Having recently attended a forum of experienced industry experts it was interesting to see what they perceived to be the major challenges facing the lending industry at the present time.
The uncertainty in the Buy to Let (BTL) market, the use of Fintech and the perennial problem of lending into retirement dominated the conversation. We will look at all 3 over the next few weeks, but in this commentary, we will focus on the BTL sector.
With over £40 billion of BTL mortgages completing in 2016, it is the highest completion figure recorded since 2007. Statistically, over 60% of the mortgage activity in 2016 was landlords re-mortgaging existing loans. They took advantage of some very attractive rates, trying to beat the 3% stamp duty levy introduced in April 2016 and/or trying to complete before the introduction of the new minimum underwriting standards introduced for BTL mortgages in January 2017.
Undoubtedly, there is a further test to come in the BTL sector with the second stage of PRA changes to be applied from 30 September 2017. Portfolio landlords who are defined as “professional landlords” (with four or more mortgaged BTL properties) will come under the microscope. Lenders are expected to bring in specialist underwriting processes to deal with the new regulations, which will include requests for accounts or tax returns, tax overviews, SA302s, business plans, cash flow forecasts and bank statements.
Where there is concern there is often opportunity. For example, PWC predicts that by 2025, 7.2m households will be in rented accommodation, compared with 5.4m today and just 2.3m in 2001. This suggests that BTL borrowing will continue to grow.
It will need to; with a reported 28 applications in with the PRA and FCA for banking licenses, together with a further undisclosed number of non-bank applications in the pipeline, we have no doubt that those applicants will have a BTL proposition in their armoury.
However, we wonder whether the market can support so many existing and new providers. Only those lenders that have strong enough business models, who can hold their nerve and avoid potential relaxation of criteria and price pressures will prosper.