The complexity of the buy-to-let mortgage market
- 32 mins 17 secs
- Matt McCullough, National Sales Manager, Residential Mortgages, Aldermore
- How Coronavirus is impacting on the BTL market
- Why the BTL market is becoming more complex but offering greater choice to clients
- The importance of basing business on value for money principles rather than initial cost
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In order to consider the viewing of this academia program as structured learning, you must complete the reflective statement to demonstrate what you've learned and its relevance to you. By the end of this program, you should be able to understand and to describe what you should be talking to your clients about right now. Why the biter let market is becoming more complex and the importance of basing business value for money principles rather than the initial cost. Please complete your reflective statement to validate your CPD to discuss the growing complexity in the biter. Let market. I'm joined now on academia by Matt McCullough, his national sales manager at ULTIMO. But thank you for joining us. Let's start with Corona virus. What impact is that? Having on the biter let market phenomenal amounts? Really, I'm so first and foremost the purchase market you will know is a lot slower than usual. Main point of that is the lack of physical valuations, because there's a lot of obscure properties in the vital and market, whether that be above commercial in highly urban areas, things where you would find it very difficult to allow the best of valuation to process that also limits that the property market slightly. But more importantly, there's no viewings being Door Onda. Whilst there, the industry is trying its best to get virtual viewings and all that good stuff happening via agents online. It doesn't take away the physical field of actually going busy in a prophecy, getting a feel for it. Understanding what, what, what you use an investor could get out of this property and also getting a feel for what state of repair is like. You know how much you're going to need to put into this to get some good, strong rents of years out of it. What that means this that's driving a predominant remortgage market. We were already in a remortgage market anyway in the main, but this is driving that re market activity even further now. Where that becomes a problem is that there's now a lot of restrictions in the market around what you can remortgage violence for and what you can't some of the more flexible areas i e. A revote re mortgaging cash to fund future purchases. They've been taper back across the industry of the moment, so options in the Bible industry, due to Corona virus have actually been tapered back. Weitz and quite a bit now. One of thes off really important points, though, isn't it? Whilst the re mortgage market is always has been a main play of a bite of that part of the past three years, interestingly, application volumes across the market of it, it's quite a lot that that's probably down to a lot of landlord confidence. A bit of research we did recently shown that sort of 80 a Our 10 landlords have being affected negatively from the Corona virus pandemic. Whether that be obtaining finance security around their future and current tendencies on also ongoing property portfolio. Your plans have all come to a halt now, free of the main reasons they have been effected negatively over the device. Do you think that this is something that's only going to happen during the lock down, or do you think people should start to think about this? Being quite a long, drawn out process is over, the economy gets back to normal. I think that it will only become long and drawn out right being completely honestly, if if the lenders don't start to adapt to the new ways of working. So a lot of lenders like ourselves have been very proactive in getting best top and remote valuations of the morning that in my eyes and used to be a thing of the future to continue not just to make it easier to get business. Dawn makes it quicker. Makes its liquor actually makes a lot off the the risk weighting that we currently have on physical evaluations disappear a little bit, allowing more capacity for evaluation firms to go and do more complex viewings, or so on and so forth that actually will have a positive impact on the property market. It'll speed things up. Do I see it continuing? I probably do see an element of social distance in impacting bite of that growth quite a bit over the near future, not from the basis of, you know, valuation. I've been carried out on properties, not be able to bond sold more soft the technicalities around the eye. If we do have people that rent that are involved in areas of work effective like hospitality, travel, media, industry, stuff like that, if these people are struggling on a day to day, whether it's in their work, whether they're being furloughed or wherever it just hard for them to relocate. That will also affect the Bible. That market I feel. How much confidence can people have in things like desktop valuations? I can see it's a very interesting idea, but how well tested is it? So it's happened for years in the industry, you know, many, many years have you invested? Valuation? Did the remote surveys. You know, it's something that, from old was pointed out that we've been asked for it for numerous years from our broken symmetry community on it is ah is very much, er, you know, how can we then take this to the next level to make it? I think off in the future in terms of how robust they are and how reliable. I think it is really strong. Yes, there are certain coffee ups, as you will have seen, that it's you're not going to be able to get a really high RTV by till that best evaluation done. It doesn't work, is ready and watch for the standard vanilla property. You know it's not going. Teoh is not going to provide valuations for your landlords that have really city sensor urban development properties on left above commercial properties, properties. I've got highly value high acreage on, and even those ones are really high value. It is very much your classes and run of the mill vital prophecy that can obtain a standard valuation that wouldn't really cause any issues of a physical evaluation. So not shell. If a value, uh, would be able to go out on value and do that in 30 minutes. There kind of things that would qualify for a desktop. The easy, straightforward but the ones that can also be back talk with comparable sale evidence that we have to complete refer to, well, what we've started on Clearly the situation that's in front of us now in the first half of 2020. But more broadly, what have been the main changes that you've been seeing in the by to let market over the medium term over the last 3 to 4 years? So 3 to 4 years people have really adapted to the PR. A change is quite quite aggressively, really. From a lending point of view, I also from a cost point of view, I think the change off so vital that if I look back, So if I go back four years, five years, a bite of that mortgage, in most instances, I could get the inquiry in the morning on. I could write that vital that mortgage on my lunch break. It was dead straightforward. You know the rental yield to be good. To calculate it be easy. Everyone doesn't even off the same calculations or you're playing with his. What can I get for that? I want a couple to raise. What's the most I can get? Where can I go for that? On also, who has the best rate parts available now it's completely different. You've got to look at different angles of the I C I hurdles appointed place that different at different lenders. The stress race that appointing place that it the different the different lenders. More importantly, the reasons that you can obtain finance now a vastly different. So if I was to go back so off, so let's take hold him off. Example. We've done limited, accompanied by Phil after 10 years, but the industry itself as a main of vital that has only really started to see a vast increase in that in the past due to free. That is because it is becoming more tax efficient tohave the large landlords place their properties into it S p via such or company. Now that's the big change that we've seen. There was again hurdles, stress tests used to be extremely flexible. He's a really easy to field. Now you potentially got. If you look in a portfolio, 10 properties off mixed use you possible looking at four, maybe five distant, different. I see I calculations just for that one portfolio a lot, a lot a client. So that adds on to the complexity of what was now what is now a complex bite of that world. On this, some more things to consider. So what I would say is that so if we cast our minds back a little bit, if we go back to sort of circa 2014 15 it was approximately 800 ish products available on the market. There's now over 2300 in today's world. Now that shows you the vast amount of parks available per different lenders because there now are probably 15 16 lenders writing company by feel that business in this new world than the last six years ago when they were seven. So clearly the increase in lenders, plus the increasing products is making it. I would not want to say easier to get access to a bite of that product in this market, but it is still very complex to place that business because of everyone's different hurdles, different criteria and different on direct procedures, they follow one thing that is really clear to me. Looking back over the last four years, mainly probably think, circa 80% of business around about two falls and 14 mark in particular was on two year fixed rates on. I think every bite landlord would like to be in that two year model. Where I'm looking to refinance every two years, keeps it fluid, keeps it fresh, actually keeps it flexible so that if you do want to downsize or couple of race to increase you doing that often basis. What we are seeing now, though, is that the stress rate hurdles are enforced on a two year fixed rather than five year fixed, are more stringent and therefore that means that the fire, the FX is now the vast majority product shows in the industry solely because it is easier to get money out of your property on five year money than it is to on average. How many properties the using landlords being in possession off? Is that changed much over the last 45 years? Not really. It's quite boy. And so I would say that a portfolio landlord, as we know, is four or more mortgaged. Now, actually, a portfolio landlord in the overall scheme of things only makes up 25% of this mortgage of the industry of vital. The 75% is all your below for more his prophecies on hold free properties in the portfolio. But that type of person where they've got, I think, the average last time we checked out the back under 2019. What's the average? None. Portfolio Landlord has 2.99 properties in their portfolio. On the research that we did after shows that 75% of this market are up to looking to increase that portfolio over the next 12 months. At same time, a large long lord steps recover. 25% of the market were ugly and off looking to downsize revenues to strip out the ones that aren't doing enough money for them, or just to create a bit more capacity in there and make it a bit more flexible for their working life. Because, let's face it long not still have to operate, not business on. If it does become a bit strained, then, yes, they've made some profit on the asset. What is it? Time zone and downsize and try and scale of the yields in places, but I can't. And what about average pay rates? What are they? Have you seen much change in those in the last two or three years? Yeah, usually I think this is that Venice is. I've ever met Farsi coming back from somewhere where we are still under old more. You know where you're with our prime lender when our high street lender on. Therefore we don't price that way, but I think what we do price for is the business that we take on which the higher bulky a big portfolio by that business. So the myth, it's always Arie's. It's more expensive to do big port, all your business or lung lords in company named business, that sort of stuff actually looking from the data this time now, going back to the same time five years ago. The average pay rates 1% less across the industry, that sort of two things really want. People are actually buying into the more complex bite of that business and making it seamless and straightforward. For example, what's the pointing pricing differently from an individual bite other than a company bite a lot, The premise on the process in reality is the same. So why price it differently? Five years ago, they were, you know, and therefore that's probably what's tip in the favor in terms. And it is the landlord's favor, with rates coming down over the period. Also, it goes without saying that you know of the bank of in the base rates been the Lois's that have Bean and therefore lenders will lost or try and make make my However, if we can get our more attractive product to market, that still makes the margin we need to his lender whilst also supporting the landlord on the broker than that to be done, A much change in overall loan to value a lot of value remains consistent. 1,000,000. You know, I think that you will see some people that would willing to camp out of the higher LTV's your eighties. 85% in the main 75% is the go to figure for most landlords in this market. Why is that? Because a lot of London's do have restrictions when it comes to exposure. So, you know, even if you did want to the higher loan to value vital at business, depend on how much money you lend to that, said client or said securities in that portfolio that might start a bring buck the LTV exposure that you're allowed to do on therefore set some of in that 70 or 75% bracket a ruler form, I would always say, when it comes to sort of LTV's and Bitlis is that one of the really big changes that you've got in the market of the moment is every broker will be asked to divide for a portfolio landlord a business plan in the portfolio schedule, right that just gives you site and clearly is a broker if you sign of your client's portfolio and that's a really good point managed because that gives you sight of all that their maturity dates thereby from the assessor they've got where the community flex out in the future. But a good tip for brokers to use here really is always look to do the calculations. Based on what if they wanted to borrow a maximum 75% off their portfolio, Can they get nothing that just future proofs, any sort off affordability calculations that you would do in the future, knowing that the next time you come to a place in mortgage, you've already fallen head and you know that actually, these said Properties could fit that model on would be able to obtain finance about any actual hurdles. We've talked a little bit about the backdrop to the biter. Let market that. So what should advisers be talking to their landlords and clients about right now? Future plans? Like I said before, if I was, if I was a broker five years ago, I'll be able to ride a bicycle that case of my lunch. Now it takes 3 to 4 days of planning the very least, you know, from for paperwork, administrative and fact finding point of view. The first thing I would do is a broker today is I'd be asking my client. And what are their plans for the future on why and examples being that well, actually, you know, you may well have to a free for by glass in your individual name in the moment. But what does your tax advisers say about them in the future? Is it more tax addition to start moving these into into a limited company incorporating, you know, do these people have trading limit companies that they can put a bite? Alas, in do they want to get their Children involved in Beit Lay in the future? And also some of the things that you know just to try and squash them on the nets around Specialist Vital that some people think specialist by the less really complex to do it isn't specialist mortgage could very well be a standard two up, two down terraced property for a first time. Landlord, however, is four of them, and not to not a lot of lenders allow four applicants on my mortgage. That means by default you have to go down. The special thunder route doesn't make anyone complex. Just means that you gotta put two more names on it than you used to, and therefore normally you push down the special slender room. So it's things that you've got to get on the on the path first of all before you got there. A quick tip around that is that, as every lender is starting to, actually for a business plan is a landlord. Why not sit down with your client and fill that bitters final and try and map out what that looks like the next few years? Then you can start to plan the path of their mortgage journey from a broker that also plans your work in your work load of the next few years. But actually you then become, by default, some form of business partner for that landlord, which is a really good service that you could give. But how much sense does it make to try and do long term planning in the current environment? I mean, indeed, might the best advice you can give your client at the moment be Don't do anything. The situation is just so uncertain right now. Yeah, it's a really, really hot topic of the minute that because, you know, we're I mean, I'm seeing a lot of enquires to my brother contacts at the moment around what? You know, What is it that old Warlock consider what are you hearing other brokers looking to do? And actually, what is it that clients want in this day and age? It's a really difficult position to be in our our future plane. One of the things that I would always say is it shouldn't change what he was going to do. If your plan was to borrow and buy, you know, borrow from your current portfolio to buy four more properties over next 12 months. There is nothing actually stopping that physically over them. Are there lenders that could support you? Couple raising from that, for example, to buy the moment properties? What's the likelihood of that currently happening in this current market? As we speak now, in terms of physical valuations, lenders adopted an approach to anyone of fear. Load income. You know how we looking void tendencies, things like that very difficult to say what people shouldn't do right now. I think the obvious is happening right now that we will probably face into a potential down valuation summaries of the country because of property selling quicker, lower value because of the difficult difficulty and evidence of that value being substantiated on some property prices dropping by a certain percentage. That's absolutely good time to invest for Abidal investor because you know what if they've got extra capital around, if they got cash or an easy route to investment finance, then they could purchase it. What is a lower than normal price? The difficulty is trying to obtain new tenants in this day and age because some of these tenants, as we know, may well be affected by income. I could be on the field or scheme. Imagine, really unfortunate lost their jobs due to the current crisis. Interesting. Thousands of our people do so so it's really about getting to the roots off your lung. Lord, you need to understand not only your Lundell, but what type of tenants to their trucks at this point in time. Now, is this gonna drive a really good demand for corporate lacks, for example, in the industry. It might do now, because there might now be a lot of powerful companies that want to start in a growth plan this point in time and actually house, their house, their stuff, corporate. Let's could be a big thing in this market moving out of this. So it's a real difficult question that's supposed to say, You know what? How easy is it gonna be to dictate that and what we what should be looking forward for in the future? I think to keep it really basic, we should be looking to what we're doing before we just need to now is an intermediary market before focused on where certain lenders and wear suit and areas of the titans stops or fleshed made, made flexible so that we can continue that journey. A map view is a private provider you more interested than ever before in getting mawr detail out of who you're potentially going to be lending money to. We are as of now, yes, so at all the more we want to make sure that we're lending to people that you know that are not on the Giresse that are not Indus train and quite frankly, you know, can can actually afford our mortgage payment. If you needed to go for a bike left five. You clearly we you know, the bite all that income is a driver for lending. That money is based on the rental income it gets. But we're not going to shy away from the fact that because there's a lot of the majority of the UK now, there are unfortunately and fellow schemed or may have less income. Self employed borrowers have been negatively impacted. Can a landlord be confident they're going to obtain that rent on a confident, ongoing basis? We're not sure. So one of the things that we're doing for our long lords of the moment, we are asking them to fill out with small declaration asking if they've been affected by the covert 19 crisis on Also, if they have what's been affected, use their income. Is it there? Is that their payment breaks that they've asked that the clients of us far on their rent are they allowed to go free payment? Breakthrough. Different lenders because their rents not being paid another portfolio properties things like this. What we are really keen on no. Is that not being a reason not to the right a mortgage we still do today and continues the lens of people that are on furlough schemes that have voids in their current Tennessee's on that do have current issues. We obtain rental for income from their long from there from the tents. Why do we do that? Because all we ask for is literally quantifiable evidence that actually, if you really needed to as a bite of that landlord, fund the mortgage yourself for a period of time, can you afford to do so? If that's the case, then we will lend the money. You know. Example of this is that if a landlord does say they are experiencing and fear they will experience multiple rental voids over the next three months, what's his lender? Will this go? Okay, well, have you got sufficient savings to be able to repay on mortgage for the next six months to suffice that providing that all the rest commit against recovered on the rest of the cases up to scratch? It's no problem for us. We want to be is proactive and positive as we can to give people the access to the Martin, the mortgages, but they have before Well, you've touched on some of the key issues around locked down there, Matt. But in the round, what are the other key questions that as an advisor you should be asking your clients right now. So I think, like I alluded to before ready. It's very much a case if you can't right by letting you want shower anymore. Doesn't work like that. You need to get deeply involved in So what? What your what your customer perspective landlord actually wants to do with their properties? I want to say do whether they want to hunt by investment. So some of the questions that we need to start asking these people and you should know them already. But if you don't, you know I'll be employed. But it's self employed. They won their own train, limited company and the little things around their lifestyle of employment. Why is that important? Because that could be a driving factor of where they actually place, thereby to lay in the future. Now I'll give an example of one that we really blinked to life on adult more really on. It's based on what someone we call Mr Smith, who is a director of a trading company. Mr. Smith has a wife as free kids. He owns 10 properties in his individual name. Now, two of them are up for renewal. Currently, in terms of the polyp maturity on the over eight are set to expire off a different times over the next three years. Now he sought some advice in the accountant that says is probably right, that he put them in the company name for tax benefits, but not right now. So the question is that an adviser would need to ask. On that basis is where should report these? What you're looking to the restaurant of the future based on that, not just a tax benefit that you can reap the benefit off, but actually the your aunt's of plan for inheritance. You know, do your own supporters into an SPV where your Children and I was shareholders where they could potentially benefit in future. Do you want to put it into your trade and limited company that you work out of the moment to make you more manageable business? These are the questions that we should ask all on Lords now, because it's various different degrees of journeys. They can go down well, you've given us the example of Mr Smith there, but talk us through in a bit more detail. What was something other complexities. What are some of the other opportunities to add value? Okay, so I've mentioned Mr Smith scenario there, and we know full well that, you know, Mr Smith got two mortgages that used to renew. Now, we also know that the tax and accountancy advice is to put them in a limited company name or a company name in the future, but not crying right now. Now I have asked them questions. The broker I know that OK, though, on Lord really wants to start putting the company. But I feel that. But it's not right at this point in time because it's eight more in the future to do that. There's examples of lenders out now that could make this really seamless for you on this is where is a broker. I need to probably just mix up a bit. The way I work the way I would normally work is you know, I would do the rental calculations. I would look on the sourcing platforms to find lenders that could give me the right now I need for the for the for the rental figure that we need to calculate. But more importantly, I need to justify how lost the right deal for my client. Now, if I am saying that, actually, I can remortgage these two that you got to renew now for you and on the best deal because it's cheapest by £1000 on overall cost of the mortgage compared to all the other lenders are there? That's not necessarily the right advice. The reason I say that is actually that I lenders out there that will allow you toe remove yourself from a fixed rate DRC period if you are incorporating them by till s into a complete inane with that lender. So the example for Mr Smith could be the actually, you know, taking a lender like old more. For example, If we were to do something like that, then actually, you would stage all of the properties at a community mature over the next three years. And when you're on the last property I e. And the tent ready, you would then put them all into a company name on all of the properties that are tired on TRC fixed rate periods of that time. Some lenders can allow use a wave. All the SC costs that transfer them all into a limited company by a repurchase product on, then stars fresh. So when it comes down to source in that on best advice on overall cost, for example, that £1000 saving day one called actually cost the landlord circa 15 £20,000 NDRC's based on the lawns have been taken l over that period of time rather than doing some more in depth research that lenders that can be more flexible with the incorporation side of the business. So I could see this involves not just understanding that the small print in all the products understanding your client. But it sounds like you as an advisor need to be working ideally very early on with the clients. Other advisers, particularly tax and legal. Yes, very much so. So if there was a journey the most mortgages used to take and continue to take in the majority today, you know it is, Normally you've got a case. The place you've got an inquiry, you've got a long border service, you start, we criteria. What's different about this? Why do you need to come right? I wanted to go to a different lender than you normal under. Great up from that after the lender Research. Now, look. Okay, What fits? Calculation wise, rate wise, Great off. But the client there's that There's a service I offer. Now it's a case of right Check your accountant, but the accounts of advice might be completely different. All the research and work that you was the broken asking a lot of time doing so My advice now is actually do that at the start, getting a client and the tax advisers of link up first and speak even better. The broker, a tax adviser, get to know each other, get to understand what the client is actually after. Thought also what the client can benefit from if they need to from a tax and accountancy part of you in the future. That way, there's no re work being done that way. You're you're lining that mortgage opposite business if you wish to do so rather than just re mortgage repurchase transactions on the also saves a lot of to and froing later on the stage Potential re application for mortgages. If the correct advice is the party's in a company name for for whatever benefit they see fit. You've described a world map where there's a lot more complexity is coming over the last few years fundamentally, has that completely transformed the role of an adviser? Or is it at heart? Exactly the same job is? It always was. I don't think it's fundamentally change the role, the role story major saying. You've still got about vice and mortgages. You still go find a client the best deal for the circumstances. I think that the process of doing so has changed dramatically. You know, I used the example for me. If I If I am writing vital that on, I'm dealing with, you know, a large scale portfolio, Long Lord, I wouldn't start sourcing. There's no point. Try a source. A product you need to find a lender that will allow the complexities that have their first, whether it's the volume of property that got in the background wherever it's weather and then come for the name our individual. However, it's tomorrow morning I want to borrow in the first place might be hiding their allowance, so actually I would now by default, go straight to my lender mediums. These other people are going to get me down the right path first without me having to spend hours and hours of research. How do we do that? Well, clearly you could never get on the incident email and send out he BCC animals of normal, whatever that may be. But first point is understand where I am pointing these. There's no point sources on best rate. Our overall cost is not gonna work on vital that you need to source else or not the lenders first in my mind. Long lords you know by Philip Brokers in this in vantage now becoming expert if there wasn't already, you are fast becoming a vital expert because of the complexity facing everyday sourcing Now begins in your head. You get a feel for what lenders will take, what unloads based on their complexities. And then you know where to start. If you know you can go to the High Street for a very vanilla, you know, to proper along Lord to buy the last remark, it power for pound, you know where it's gonna go is quite straightforward when you've got a long, large Iran's first by flats in the background half of Richard Hatred Mose, half of which are individual properties off which half of them are incomplete. Name, comparative individual name. It becomes a lot more complex on the that the funnel of lenders are available. Syria start to slim down, but that slimming down process to start in the head on. That's when you start engaging more with you, be the EMS, finding out how to place these cases properly. But also understanding where the points of education are. Reverence process on the legal side of things that takes a bit longer. If you don't know how to do, you know different sorts of that process. But also if it's the packaging side of things some lenders, us and more documents and over it's getting used to that so that you can get it right first time so that what is a complex find select journey actually becomes straightforward. So, final question. How do you go about setting up your business so that at the heart of it is this focus on value for money, this sort of value for money Met matrix, if you like, rather than just cost, how do you articulate it to yourself, your colleagues and your clients on, and perhaps even the regulator? So it's all about knowing your customer very basics. K Y C. It's the start of every sort of fact finding business. Know your customer know your needs if we take a very basic advice model. You know, if a client is talking about, they want long term stability. They want the rate. It doesn't change due to market conditions, a fixed rates where you're gonna point them, right? But that's just on that scenario. Let's have a look at a broader picture from a lung Lord. What you looking to do of your portfolio? It's currently, let's say, you know, the LTV's low. Are you looking to couple raise over the next few years to grow that, to buy more properties? Would you looking to do a further advance on men properties? For whatever reason, join the term of the mortgage and how fast you want to get that capital over a period of time. The reason Then question. You know, these questions are valuable, and the reason why I need to think that way now in my business is to actually understand, right? I need to become a business partner for this long Lord so that I can help them grow their portfolio in the way much is their needs. What I can't be doing is taken what their You know, what their instructions are today and having to make that work tomorrow. It might know, you know, if I have that she was a lender that, based on current overall cost, is the cheapest available. But they do not allow further advances on their mortgages on the client is largely sign posted. They wish to do a further advance in the next couple of years. What do I do? Because it actually the rate doesn't fit on. The two year fixed has been on a five year. That means in the next two years of looking to do that, they're gonna be tired and TRC's. If they don't allow further advances, I can actually help. We won't have already signed posted before. So it's all about getting under the skin of the long term business part of your landlord, even when you first introduced to them before even place a case discussing business time together. What is it you're looking to do? What do you want from your broker? Although these next 5 to 7 years on then I, as the broker, can evolve to that, adapt to that and also give you what you need whilst also maintaining that the advice is absolutely perfect and right for you. Based on your circumstances, we have to leave it there. Matt McCullough. Thank you for joining us. Thank you. In order to consider the viewing of this academia program as structured learning, you must complete the reflective statement to demonstrate what you've learned on its relevance to you. By the end of this program, you should be able to understand and to describe what you should be talking to your clients about right now. Why the biter let market is becoming more complex and the importance of basing business value for money principles rather than the initial cost. Please complete your reflective statement to validate your CPD.