Whether a property tycoon with a bulging portfolio or a parent with a flat for their kid at university, buy-to-let (BTL) is the cool fad of the ‘noughties’ property market. Spurred on by television and the escalating crisis with the UK’s pension pot, people have continued to plough their pounds into bricks and mortar at increasing rates and lenders have been eager to back up these ambitions with hard cash.
However, the fears over how eager investors are now beginning to be questioned as the fine lines between profitable and affordable are being pushed further. Some had questioned whether the phenomenon of ‘criteria creep’ was putting landlords at risk, with reports in the national press of auction houses filling up on properties which were once in the possession of BTL landlords.
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The BTL sector though remained upbeat and insisted that all was rosy in the garden. That was until Lee Grandin, managing director of Landlord Mortgages, raised his concerns over lenders giving money to inexperienced landlords in terms which allowed very little margin for error.
Grandin said: “Lenders are potentially setting financial traps for novice landlords with 100 per cent mortgages, forcing them to hand over their entire rental income to the lender each month, leaving them open to arrears if there are problems with rent collection.
“100 per cent mortgages should only be lent to landlords with the necessary experience; a portfolio of 25+ properties, or a portfolio worth over £5million, which should have been amassed over three years or more. To give them to people with minimal experience is short-sighted on behalf of the lender.”
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So are lenders being irresponsible in their dealings with novice landlords and, at a time of rising interest rates, is the BTL sector starting to get worried about its exposure?
Tony Capon, head of intermediary sales at Salt, admits he has concerns: “Some lenders have gone too far. Those at or close to 90 per cent loan-to-value (LTV) with no rental cover requirements are in dangerous territory. If you are selecting that type of product then it can’t be working for the majority of lenders out there.”
Jonathan Burridge, managing director at Quantum Mortgage Brokers, believes the sector is entering a new phase.
“BTL has not had to work in a rising rate environment before so we have no idea where, even with stress-testing, we will see it land. Anyone doing a BTL may see loads stretched but I don’t have any particular worries over it.”
However, most in the industry will argue that those landlords who have been in the market for a reasonable amount of time will have the structures in place to cope with rising rates.
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As Matt Grayson, head of PR at BM Solutions, explains, the majority of landlords already have a significant stake in the property and aren’t looking for high loan-to-value mortgages.
“Most lenders ask for at least a 15 per cent deposit and our average deposit is circa 35 per cent. This means there is a lot of equity in the property. Also, most landlords are in for the long-haul as well so they are planning well down the line.”
It seems though that where these high LTV products are being offered, lenders are beginning to tighten up on who has access to them. Mortgage Express this week announced it was extending its lending criteria for landlords who had been in the BTL market for more than a year.
Andy Wiggans, director of mortgage products at Mortgage Express, says: “We are no more worried than we have ever been about inexperienced landlords. Where we have stretched criteria such as rental cover or LTV, we have always looked to mitigate the increased risk in some way, be that through rate, credit score or other lending criteria, for example, asking landlords for a certain amount of experience.”
But can lenders go much further when it comes to stretching criteria, regardless of the applicant or the economic conditions? Ultimately, BTL is an investment and landlords will have to make the property worthwhile in a business sense.
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As Capon explains, stretching too far now will only hurt people further down the line: “I’d be comfortable lending at 85 per cent and 115 per cent rental cover but you’ve got two sides to the market. You have the true professional landlords who are taking a long-term view and if the rental cover across the portfolio is low then this kind of deal is fine. However, if you are lending to first-time landlords and lending high LTVs and low rental covers then you are stacking up the problems.”
For Grayson, stretching criteria isn’t viable for lenders either and they will have to change tact if they are to continue succeeding in the sector.
“Some lenders are coming in and pushing criteria but it doesn’t give you a sustainable competitive advantage. If you think you can come in and establish yourselves in the medium term on stretched criteria then it’s not viable. You’ve got to build on a brand name and your service levels to get a foothold in the market.”
But at the end of the day, it is up to the broker to help landlords judge what is and isn’t viable as a BTL deal, regardless of whether there is a product out there.
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