2 weeks into the new year and already I am seeing opportunities particularly for portfolio landlords looking to refinance properties or seeking the funding to support an increase to the portfolio.
Tenant demand appears strong, and in two large deals – one for 90+ houses and another of a 46 bed HMO both of them are already fully let! The rents are over 200% of the loan debt service.
I expect most investors have positively received the result of 2019’s General Election returning a Government much more likely to help the housing market. There is generally a healthy outlook to 2020; even more so if we can get a successful Brexit outcome.
Last year was another record for our business and the volume of lending for buy-to-let, I believe the market began to kick on again after a number of years adjusting to the regulatory and political changes implemented to the market.
This adjustment affected portfolio and professional participants, creating competitive and innovative lender activity as they responded to the move towards larger portfolio landlords and their requirements. The challenger banks being much more agile and nimble took most advantage.
Specialist buy-to-let lenders adapted their propositions towards portfolio landlords – catering for SPVs, Overseas Investors, and portfolio purchasing with competitive rates and flexible criteria. Whilst there is a large choice of lenders for the straightforward deal there remains a requirement to use specialist lenders for deals that are ‘quirky’ and or, complex and require a degree of understanding without which could easily be declined for being ‘out of lending policy’
Policy restrictions exist to protect the lender and are sometimes based on the lenders previous experience where they were adversely affected. Lenders use various stress-testing measures and criteria including minimum/ maximum loan size, minimum property valuation (even in a portfolio purchase), maximum LTV, location and concentration of risk assessment, etc.. When considering a buy-to-let lending decision; this can make the process seem much more complicated for portfolio landlords and the amount of information and disclosures required can be frustrating before the mortgage can be secured.
Portfolio landlords should not to waste time, energy, resource and money applying to lenders whose lending policies mean they have very little chance of lending.
At Specialist Property Finance we take the steps of understanding the deal and essentially ghost underwrite the deal before we approach the lender with an application. This process narrows down the lenders to just the ones expected to lend, thereby helping the landlord save time by not going through multiple lenders until they find one that wants to do the deal. In addition this service motivates the lender to work with us as we bring them the deals they will lend to as we have already qualified this before we approach them – which also saves them time.
Most lenders use a stress test involving an interest cover ratio (ICR) – they assess the portfolio as a whole and apply a higher rate to see if the mortgage is still affordable if interest rates increase or any other financial impact that could cause a change in circumstances. It’s not good enough for rental income to just cover the mortgage – lenders generally use an interest rate of between 4.5% to 5.5% and then stress this at a ratio of 125% to 145% of the resulting payment. If your portfolio doesn’t past the stress test you need to consider if the deal is right as its not stacking up with the lender, if its not why is it stacking up with you? The lender will also calculate any required income the landlord needs to take from the rent to get to a net income position and this needs to be taken into consideration.
I generally find that as long as the deal stacks up there will be an appetite to lend and this is essential to a successful application.
Some portfolio landlords may already have a portfolio of properties that have excellent ICR and may have existing funding where the introductory rate has expired and they are paying the standard variable rate. This represents an opportunity for the landlord to refinance, capital raise AND reduce the monthly debt service charge all in one stroke. Other landlords may have good ICR and unencumbered properties that could capital raise at a very low rate and generate cash funds for further investments.
It’s Imperative that you understand the financial situation of all the properties you own as you may be able to secure both larger loans and more competitive rates – increasing your monthly profitability and raising more cash funds at the same time.
Most portfolio landlords I meet have ambitious plans and if the first 2 weeks of January are anything to go by – 2020 is a going to be a successful year for many property people.