November 2019 | Buy-to-Let

Bob Young: There is more to a decision than rates

Bob Young is chief executive officer at Fleet Mortgages

In our market there can be a tendency to put the cart before the horse, especially when it comes to analysing and making comment on what is perceived to be industry ‘normality’, or what the trend for the buy-to-let sector might be over any given time period.

Take, for instance, the recent figures put out by UK Finance on buy-to-let lending and activity, and couple that together with the perception that the market is ultra-competitive – which it is by the way – when it comes to product pricing right across the board.

So, those UK Finance figures appear to show some noticeable growth in buy-to-let lending activity over the past six months in particular when it comes to purchasing, and that remortgage activity has stayed pretty consistent.

All well and good and, certainly from our perspective, we’ve seen an upturn in activity, especially when it comes to portfolio and professional landlords seeking to grow the number of properties they have, and the methods by which they are doing this, most prominently through limited company vehicles.

Plus, of course, there’s been a slight shift in the types of properties being bought, with some landlords looking to add higher-yielding HMOs to their portfolios.

But what is the underlying reason for this pick-up in purchase activity? According to a recent article I read in the Daily Telegraph, it is predominantly the fact that buy-to-let mortgage rates are at very low levels.

To which my answer is that, if seasoned professional landlords are making purchases based on mortgage costing alone, then I would check their sanity and suggest they’re not really cut out for this landlord lark.

Don’t get me wrong, mortgage costs are always going to play a significant part in the overall decision, but to somehow suggest that landlords are basing a purchase decision on the cost of the mortgage alone is quite wrong.

Clearly, if the cost of the mortgage is lower than anticipated that would be welcome, but it’s firstly not going to have a bearing on the initial decision to purchase, neither I must say is it going to have a huge bearing on the lending decision, because this will be incorporating other important factors such as the property, prospective rental income, and everything else that would be a part of our underwriting process, into it.

So, let’s get back to reality. Lower buy-to-let mortgage costs are not acting as a huge incentive to landlords increasing their portfolios.

What is happening is that landlords recognise the strength of the private rental sector, they recognise that there are few short-term solutions to the housing gap in the UK, and they therefore recognise the strong tenant demand that exists.

They also recognise the power of the property asset in terms of its ability to deliver decent income and (over time) increased capital values.

At the same time, we have a landlord community which – after three years of change – is now much more comfortable with its position, and perhaps has the financials to be able to refinance existing assets and/or utilise their rental inflows to purchase more properties.

Again, to stress, it’s at this point that they’re going to feel the advantages of the current competitive marketplace, and by utilising the skills and services of quality advisers they’re also going to be able to benefit from their ability to search the whole of the market and recommend the right product.

Coupled with this, advisers and clients have a very supportive specialist lending community who not only want this business from professional landlords but can offer them a flexibility and understanding of their needs, their background portfolios, their business sense, and their ambitions for the future.

Given that ability, while low-pricing is nice to have, as long as we are confident that the purchase can work for all, there shouldn’t be any mortgage-cost barrier in place to stop landlords from moving ahead.

My point is that the reasons why landlords are increasing their portfolio sizes clearly isn’t based on the low rates currently on offer. If that was the case, then no one would have bought when rates were a lot higher.

As always, landlords are looking at their purchase opportunities in the round – they are not looking at mortgage best buy tables, thinking, ‘Well, rates are great, let’s go out and buy another property.” That really would be putting the cart before the horse.

So, from an advice perspective, while you might wish to contact existing and prospective clients with headline rates, remember to point out that there is much more to the purchase decision than this alone, and that you can help take them t