Buy to let brokers & landlords need to be in it for the long haul
The buy to let market has seen considerable disruption over the last 12 months. With the changes to taxation and rental calculation, we saw first time investors think twice and experienced landlords considering their options before gradually returning to the marketplace.
In some areas of the country, London being a prime example, we are seeing fewer buy to let sales because of falling property prices affecting rental yields to the extent that some lenders no longer even have an appetite for properties at 70% loan to value.
Whilst all this has clearly had a negative impact on the Broker’s bottom line, there continue to be Brokers out there who are treating buy to let mortgages as purely commercial transactions to enable them to do the minimal amount of work and due diligence required. We have already seen some buy to let mortgages become regulated and make no mistake the rest will follow.
Many Brokers and Lenders, along with the FCA, have indicated that they feel it would be difficult to regulate all buy to let purchases, largely due to the issue of understanding where the line should be drawn between a residential property and a commercial property. To me the answer is relatively straight forward; if someone is going to reside in a property then it should be regulated.
The complaints culture in England appears to be on the increase largely thanks to the PPI claims over the past few years and with this in mind Brokers should take a much stronger stance on compliance for all mortgage cases, including buy to let.
The FCA has shown on more than one occasion its penchant for introducing retrospective regulation and it seems that this could continue through the buy to let marketplace once they get to grips with what can be classed as regulated.
As well as treating this business with the same regard as residential it is important to appreciate another key point: affordability. Plenty of consideration is given on a residential mortgage to ensure it is affordable yet with a buy to let mortgage Lenders will even accept an application from someone without an income.
To my mind the area that you, as a Broker, will most likely fall foul is the correct assessment of a client’s ability to meet and maintain the repayments on a buy to let mortgage. Traditionally the industry has simply looked at the rental income to ensure that it covered the mortgage payments with little regard for other costs that may have a bearing on a client’s ability to meet the repayments.
With the average interest only buy to let mortgage payment in the UK currently sitting at around £475 per month and rental payment sitting at around £786 per month, a client could be forgiven for thinking that they can easily meet their mortgage payment based on these figures.
When considering ANY buy to let mortgage a Broker should be going into far greater depth when assessing the client’s medium
to long-term ability to keep up the remortgage payments. The moment you consider agent fees, possibly ground rent and maintenance, utility certificates and voids, which are typically 3 months in any 12, we can see that clearly many of these mortgages will need to be subsidised.
In addition, we also have the new taxation rules which prevent clients from offsetting their mortgage payments against tax, the best-case scenario here would result in a 20% loss in revenue for the client. In reality most landlords are likely to make a 40% loss in revenue due to their main income deriving from another source, commonly an employed role, meaning their rental income takes them into the higher tax bracket.
Brokers should therefore be carrying out a full assessment of a client’s plans regardless of whether they are a first-time landlord or an experienced landlord. Most importantly a Broker should be able to demonstrate that the client both understands the investment they are making and also the costs involved. To overcome this, many Brokers now complete a simple business plan highlighting the client’s goals over the short, medium and long term, and clearly breakdown all costs to gain clarity on the real return on investment.
Even with all the upheaval in the market over the past 12 months, on the whole, buy to let has largely returned after the recent hiatus and should be considered a valuable business source with plenty of opportunities. Landlords who are not looking for quick cash and view their investments as part of a long-term strategy will continue to build and expand their portfolios, leaning on Brokers for much needed guidance and support.
Equally, with the increased work now involved it is much easier to justify charging a fee to a client for the valuable expertise you can offer to them, particularly as competition amongst Brokers for business will continue to reduce as more and more rogue Brokers are leaving this area due to the tightening of regulations and additional level of work and due diligence required.