This is a kick in the teeth for the product specialists who spend hours creating buy-to-let products to meet landlord requirements.
So what type of innovation do landlords want? High up on the list is a product which allows a landlord to buy a tired property, add value to it by doing some light refurbishment, and rent it out at an enhanced rate, generating a higher yield.
One of my consultants came to me recently with a perfect example. It was a two-bedroom apartment in Richmond, London. The kitchen and bathroom needed replacement but were useable, and the walls were covered in 1970s wallpaper, which needed stripping and a fresh lick of paint.
When I saw the property particulars I thought this is exactly the sort of property I would buy. It was in a good location, close to local amenities and transport, making it attractive to working professionals looking to rent.
But above all, it was at a price that allowed value to be added to the property.
Spending around £10,000 to £15,000 on the property would easily have added an extra £50,000 on the value at no more than four weeks’ work.
After sending the link to a number of lenders, most thought that it would not be suitable security, and the consultant struggled to get funding despite the applicant being an existing landlord with an impeccable credit rating and having a well-paid job.
The lack of products that cater for this type of property is disconcerting, given the commercial rationale behind the acquisition.
There is a fine line between these properties being certified as fit to let and habitable or not.
The landlord is at the mercy of the surveyor and their opinion, with varying guidance from lender to lender.
Brokers find inconsistencies between surveyors frustrating, especially if the property is already rented out.
Generally, what happens is the property will be declined or a full retention is put in place, which will more often than not kill the deal.
When landlords search for an investment property, they always look for one where value can be added to boost the selling price and the equity to cushion any falls in price.
They will look for words like ’modernisation required’ or ’property needs updating’. This gives them more scope for negotiation and a better price.
It is an old cliché in property but you make money when you buy, not when you sell.
A buy-to-let mortgage means exactly that. The property is to be bought and let out immediately.
For those transactions that don’t meet this criteria there are few alternatives.
The Mortgage Works is one of the few that offers a light refurbishment product. Other lenders need to follow suit.
I understand that the increased cost of processing in the extra underwriting involved is a factor.
But if this cost is passed on to the client via a higher rate and higher fees, most landlords are willing to accept this. At least they will have an option.
Similarly, if the LTV is reduced to cater for the initial void, this is also likely to be accepted.
The other challenge is complacency. Lenders are already hitting their targets with their core range, so why innovate with a product that only complicates matters?
The mortgage world we operate in is no longer driven by sales and volume but by risk and regulation.
In the current economic climate product designers have become increasingly attentive to risk, stifling further product innovation.