Jeff Knight is director of marketing at Foundation Home Loans
We’re all acutely aware of the uncertainty that exists within political circles and the UK economy.
This means that buy-to-let lenders are having to work that bit harder to provide landlord clients with additional choice, certainty and flexibility where possible.
One growing trend which we – alongside many other specialist lenders – have certainly been focusing a great deal of our attention on is limited company lending.
As such, it was little surprise to see the recently released BVA BDRC Landlords Panel Report for Q3 2019 outlines that 63% of landlords intend to purchase their next buy-to-let (BTL) property within a limited company structure, a significant rise from Q2’s figure of 55%.
As so many of our mortgage products are available to both limited companies as well as individuals, our borrower behaviour data also supports that trend: our top-selling fee-assisted BTL product has attracted more applications as a limited company than as an individual applicant this month.
The BVA BDRC report suggested that the appeal of a limited company proposition is now equally strong between smaller and larger portfolio landlords.
Landlords with 20+ properties tend to have a more diverse portfolio ownership structure, with over one in four having a mix of individually owned and limited company status properties, and one in seven operating all properties within a limited company structure.
The question of whether to borrow via a limited company vehicle continues to be one of the most common themes within the current BTL area.
There are many benefits, but considerations must be taken over the landlord’s number of properties, future plans, financial circumstances and exit strategies.
However, with competition amongst lenders intensifying – and rates decreasing as a result – it’s little wonder that greater numbers of landlords are utilising this facility within a robust BTL marketplace which continues to defy the critics.
Figures recently published by UK Finance showed that the number of purchases using buy-to-let mortgages had risen every month, except for one anomaly in June, for the past seven months.
In August, 5,900 borrowers purchased a rental property with a buy-to-let mortgage, almost a quarter (23%) more than the 4,800 who did the same in February. These represent some positive results.
Focusing back on the Q3 Landlords Panel Report, let’s take a look at how landlords are coping in the current economic climate, their confidence levels, activity, financing and yields.
Below are some of the main take-outs from this report.
· The typical landlord has been letting property for 18 years, and intends to continue letting for a further 12 years – On average, landlords with fewer properties in their portfolio tend to have been operating for a shorter amount of time than their larger peers (1 – 4 properties = 13 years, 11+ properties = 24 years), although both intend to continue letting for a relatively similar duration (11 years vs. 15 years).
· Profitability remained largely unchanged in Q3, with 84% of landlords currently making a profit – However, just 4% of landlords have seen an increase in their profits since the 2015 Budget announcements and 51% have seen profits reduce.
· The average rental yield achieved edged up to 5.6%, a marginal rise from the nine year low recorded in Q2 2019. There was a 1% differential between the highest yield generating regions, the East Midlands and Yorks & Humber (6.1%), and the lowest, Central London at 5.1%. It remains the case that over one in four landlords don’t know what the average rental yield they achieve is.
· Two thirds of landlords carry BTL borrowing across their portfolio. Just over eight in 10 leveraged landlords have solely interest only mortgages, a further 10% have a mix of interest only and capital repayment mortgages. 12% have only capital repayment mortgages, with this more common amongst landlords with only a single BTL property.
· The proportion of landlords looking to reduce their portfolio size in the next year remains high at 24%. However, this figure has edged down slightly from the record high of 26% recorded in Q2. Those with larger portfolios are the most likely to be looking to divest, with close to four in 10 intending to reduce the size of their portfolio in the next year.
These results represent something of a mixed bag, which is not entirely surprising. It’s fair to say that challenges remain for lenders, intermediaries and landlords but for every challenge there is also opportunity, and the advice process remains at the heart of successfully maximising any opportunity.