The private rented sector now stands at 18% of housing stock and is projected by some to grow to 25% by 2025. Lenders are key to this growth. Many landlords have proved we are a pretty safe bet when it comes to lending with repossessions in the buy to let sector standing at just 0.13%. I make presentations on financing your portfolio from the landlord’s perspective and I often hear frustrations from colleagues. I’ve summarised here some of the ways that lenders could be more landlord friendly
1. End high arrangement fees and confusion marketing
A number of lenders apply arrangement fees of up to 3.5% of the loan. This particularly discriminates against London landlords where property values are higher. Imagine you borrow £200,000 at a rate of 2.99% with a 3.5% fee. Calculated over 24 months this is actually the equivalent of 4.49% with a £995 fee. So although the rate looks great, it’s a poor product. High arrangement fees crept into the market about 6 years ago, I’d like to see them make an exit.
2. Stop assuming employed people are a safer bet
Lenders see employed people as a safe bet. As little as a contract of employment or 3 months payslips is enough evidence for a loan. But an employed person could be sacked or made redundant with little notice. Although self employed people are constantly seeking work and are more able to adapt to changing market conditions, 2 years accounts are required. The abuse of self certification by some brokers has tarred all self employed people with the same brush, removing this very helpful avenue for many. We need lenders to look more positively at self employed people and stop assuming employment is the norm and a safe bet, especially amongst landlords where many of us are entrepreneurial and run our own businesses.
3. Appreciate the track record of borrowers and see them as individuals
Small building societies, some commercial lenders and private banks get to know their customers and make lending decisions partly based on track record. This has been factored out of too many lenders’ assessment processes. I would like to see a return to common sense where lenders do apply lending criteria but also see people as human beings.
4. Stop capping the number of buy to let loans
A landlord with more buy to let loans has a strong track record, yet many lenders see this as over exposure and more risky. As long as landlords are servicing their loans and have sufficient cashflow there should be no limit. Some limits also geographically discriminate. So 10 properties could be worth £10 million in London, but only £500,000 in parts of North England.
5. Abolish the six month rule and relax about sensible capital raising
Landlords and developers play an important role in the housing market by bringing disused properties back into use, often through a high quality refurbishment. Disreputable brokers flipped properties and created overnight remortgages prior to the 2007 crash. As a result, lenders brought in a six month rule where properties cannot be remortgaged unless the current and previous owner had owned the property for six months respectively. This means that if a developer buys a property with bridging finance, he or she cannot refinance to a mainstream mortgage product for six months. Many lenders also forbid capital raising unless the property has been owned for 12 months. This prevents developers from refinancing after 6 months and moving on to another project. There is no logical reason for lenders to adopt this approach – purely their disapproval of what happened in the past. Ironically lenders who colluded with same day remortgages are now out of business. A few sensible lenders don’t apply the six month rule, but as there is limited competition their rates are not always competitive.
6. Change the assumptions in credit scoring
Some lenders just look for adverse credit when assessing you application. Others will carry out a full credit score and look at issues like how you use your credit cards. So if you have high balances on your credit cards, they assume you are struggling financially. Yet you may have chosen to park finance on 0% balance transfer products – a perfectly reasonable strategy for an experienced landlord and developer. Generally this will reduce your credit score. For lenders that have no minimum income requirement, your credit score assessment will be more stringent and rather than being assessed as savvy, you’ll be assessed as risky. Lenders need to understand how landlords and developers use finance and change their assumptions.
7. Recognise income from property is as valid as earned and self employed income
Only a handful of lenders will accept rental income as part of minimum income requirements. Why do lenders favour one kind of income and ignore another? Provided rental income covers 125% of the mortgage payment, then additional rental profits should be assessed as income.
8. Reduce the margin on buy to let loans
Buy to let rates have been around 2% above residential rates for some time. This margin is slowly starting to fall and this is very welcome.
9. Apply sensible rental income criteria
Some lenders require 125% of the mortgage payment but assume the mortgage rate is 7%. Their argument is they are factoring in a future rise in rates. Rental income criteria should be 125% of the payrate, an increasing number of lenders accept this.
10. Improve their understanding of the property business
Some lenders apply random criteria that show a limited understanding of the property business. For example one lender says they only accept a house with sharers if they are students. Why would they possibly want to discriminate between young professional sharers and students sharing, it makes absolutely no sense. Lenders should consult with trade bodies and landlords regularly to stay in touch with the business.
11. Put robust processing systems in place
Some lenders expect paper applications only and have very cumbersome processing systems. This is not acceptable in the 21st century. They should invest in appropriate software so they can streamline the application process and use the time saved to get to know the customer and understand their track record.
