John Heron (pictured) is managing director of mortgages at Paragon
While recent tax changes have led many landlords to put their expansion plans on hold, a small but resolute group continue to make prudent additions to their portfolios.
At 15% of the landlord population – almost one in seven – these growth-minded individuals plan to purchase an average of 2.3 rental properties over the next 12 months according to recent research from BVA BDRC.
And, although 85% of landlords continue to make a profitable living from their letting activity, growth is increasingly concentrated amongst those with larger and more complex property portfolios.
At Paragon, for example, the proportion of complex landlord business has grown from 45% to 82% of completions between 2016 and 2019, with landlords in this group buying property at twice the rate of landlords in general.
Specialist lenders have been working at pace to develop their products and expertise to support this specialist customer group, with three key capabilities rising to the fore.
The first and most important of these capabilities is the capacity for deep and specialist underwriting.
Seven out of ten landlords intending to purchase new property plan to use buy-to-let finance but the PRA requirement for a more comprehensive underwriting of larger-scale landlords means that many mainstream lenders have limited interest in this segment, enabling the specialist lenders to shine.
Second, is the ability to support landlords operating in limited company and other incorporated structures.
Since the introduction of the tax changes, there has been a steady increase in the proportion of landlords making new property purchases through incorporated structures.
The most recent research suggests that over half of landlords (53%) intend to purchase their next rental property within a limited company structure. For landlords with 11 plus properties, this is even higher at 69%.
While incorporation is by no means the right choice for all landlords, lenders who can offer mortgages to landlords in incorporated structures have a clear advantage in this critical part of the portfolio market.
Finally, as cost pressures mount for landlords, the search for yield has become more intense. As a result, landlords remain finely tuned to the potential for capital growth and yield from different locations, property types and tenant groups.
However, now more than ever, landlords are also looking for the opportunities to develop the yield potential of both new and already-owned properties through upgrades or reconfiguration. And, to cater for this, specialists have been introducing or developing well-targeted, short-term finance products.
Regulatory and tax changes have undoubtedly had the effect of polarising the landlord market, driving a wedge between those with a couple of properties and those with more substantial interests. As new growth becomes concentrated among the larger scale landlord group, specialist lenders will continue to innovate to support their growth.
