There is a massive private rental sector in the UK without which millions of people would be homeless.
Yet for many mortgage lenders, the buy-to-let experience has not been good, so the purpose of this letter is to highlight the fact that there are two disparate groups of landlords in this market and that clear distinctions need to be made between them in determining the mortgage terms lenders are prepared to offer.
In recent years, the underwriting of buy-to-let mortgages has been seriously flawed. Buy-to-let mortgages, as we know them today, did not exist at the time of the last recession. But lack of past experience is no excuse for mistakes made that were simply the consequence of poor underwriting and bad lending practice.
In the race to achieve market share, many lenders ignored banking basics.
Having a background in commercial and consumer finance, one of the lessons I was taught many years ago was that the three Cs of credit were character, capacity and collateral, in that order of priority.
I still use these principles today in assessing the suitability of prospective tenants.
Most important of these is character – the profile of borrowers – and the least important is collateral – the value of the asset supporting the borrowing.
The underlying principle of this is that lenders should never enter into loans unless they regard the chances of having to enforce their security as minimal.
Most can only blame themselves for poor underwriting of buy-to-let mortgages.
Their biggest mistake was the failure to differentiate between casual armchair investors who had been suckered into overpriced, unwise speculative investments and professional landlords who continued to act responsibly and manage their portfolios based on strictly commercial principles.
The problem was that alongside the armchair investors, lenders were also suckered into the rising values hype.
We also shouldn’t ignore the fact that there are now numerous mortgage fraud investigations under way where a number of property professionals would appear to have conspired to mislead lenders.
But I’m tempted to say that lenders should take a large element of the blame for not digging deep enough and asking sufficient questions before lending.
On that basis it’s about time that the mortgage terms offered to professional landlords came in for some serious easing.
Aside from the fact that professional landlords will only invest where returns meet their criteria for making profit, many lenders face another big problem.
How do you achieve the best prices for your repossessions and who will be your buyers? By making mortgage terms so tight for professional landlords, lenders have frozen many out of the market which limits competition and leaves them with just a few cash buyers.
While it’s accepted that the frozen interbank market makes it difficult to fund all the mortgage business available, squeezing professional landlords, who think in terms of profit, in favour of residential buyers, who think in terms of cost, would not seem to be making the most judicious use of funding available to lenders.
So professional landlords are a better covenant and with sensible financing options, will often have the ability, based on rental projections, to pay better prices than residential purchasers for repossessed properties that lenders need to offload.