Sonny Gosai, sales & operations manager at second charge brokerage Clever Lending, discusses product innovation for buy to let loans and how landlords can still make viable investments.
It’s not that long ago that the budget had buy to let landlords scratching their heads wondering if the reduction in tax benefit over the next few years was the deal breaker that would burst the buy to let bubble.
Have no fear, product innovation is here. I think even George Osborne would be quite impressed with the inventive and well-timed products that have come to market since his surprise budget announcement. But a few days later George also put forward new planning proposals that will help landlords and developers extend property or have planning fast tracked for brown field sites. We’ll cover theses off in a separate article. But for now let’s stick to residential buy to let.
Every cloud has a silver lining and the sun is coming back out for landlords. They’re seeing their assets continue to grow in value over the long term and with there being no immediate solution to the lack of new build homes, the private rental sector looks set to maintain its importance for years to come, maybe even generations.
For new landlords there are still good prices to be had on residential investment property, particularly if it needs renovating. Getting on the buy to let ladder has certainly been made easier with more bridging and secured loan options for would-be investors than ever before. Lenders have raised new funds and their increased liquidity is helping to drive new products so opening up opportunities for brokers and their clients.
There are several loan types that can be used to acquire property. Bridging finance is clearly popular with buyers as it can be provided extremely quickly and good properties can be bought in a matter of days, whether at auction or one time below market value offer. This form of lending provides valuable time to sort out longer term finance and pay off the bridge at the end of the term, typically 3-12 months.
But now we’re seeing product innovation really happening with secured loans too. For those starting out on their buy to let journey, they may already have a good mortgage deal, so can retain the benefits of that and providing there is enough equity in their main residential property, they can fund the purchase of the investment property fully or in part, with a secured loan, with other funds coming from savings or a recently released pension pot. Rental coverage limits are also becoming more favourable in the current climate, loans can be taken over a longer period, up to 30 years, and they are quicker to arrange than raising finance using a remortgage.
Established landlords are also reaping the benefits of capital appreciation. This is because their portfolios now have increased equity, so allowing them to use secured loans to build their property empire. In this situation the advantage over a bridging loan is that they don’t need to refinance onto a longer term loan at the end of the bridging period. With a secured loan they can take one out for the longer term straightaway but with the flexibility of a mortgage, such as having a wide variety of product types, high LTVs and making overpayments to reduce the debt as cash flow allows. Leveraging equity in this way is a useful tool in a landlord’s armoury and one that is becoming increasingly popular as portfolio values rise and the rental market thrives.
Lenders have responded well to the market and their criteria also allows for customers who have adverse credit or a mark on their credit profile, such as a CCJ. With a more flexible approach to underwriting there are few scenarios where bridging finance or a secured loan can’t be found to purchase or renovate property. So although the budget put a few extra hurdles in the way, they are not unsurmountable. The rental market, the rise in property values, increased liquidity from lenders and a variety of product options all add up to buy to let is continuing to be a popular form of investment.
