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May 2020 | Buy-to-Let

Jeff Knight: Working through the new abnormal

Jeff Knight is director of marketing at Foundation Home Loans

Here at Foundation Home Loans, we recently teamed up with Mortgage Introducer on a webinar focused on working through the new abnormal.

The aim was to tackle questions around how lenders, brokers and borrowers are coping.

Hundreds of brokers tuned in, which demonstrated their thirst for information and how important it is for lenders to engage and be honest and transparent in these challenging times.

For the purpose of this article, I thought I would highlight some of the questions posed by our audience, and major talking points which emerged during the discussion. Why have some lenders had to withdraw from new lending?

Reasons will differ between lenders, but from our perspective the decision was driven by three key factors:

1) Lack of internal surveys during lockdown.

Our current criteria and funding requirements mean we require internal surveys, so had to quickly review our short-term lending position.

2) The introduction of mortgage payment holidays. There was limited consultation ahead of this, especially with non-bank lenders.

We got around six hours’ notice. That quickly raised serious concerns when it came to operational pressure in terms of dealing with cashflow and the volume of enquiries.

That’s not to say the initiative shouldn’t be applauded, but from a lending perspective it was a tough initial logistical challenge.

3) Pricing uncertainty.

We are a wholesale funded lender, meaning our pricing reflects what we can achieve in the securitisation market; current conditions have created an uncertain pricing environment.

This is setting down a little and we, like all lenders, are carefully and constantly reviewing market conditions, internal processes and funding requirements, and will react accordingly.

What is the main challenge facing wholesale funded lenders and how does it apply to intermediary firms? The primary focus for any lender, and any business, is around cash and cash preservation.

We all need to be careful around cashflow and maintain a real understanding of how much cash we have as a business, how much is due to come in and go out, and how outgoings can be moderated.

We don’t know how long this crisis will last, so the better your understanding of the financial impact on your business, the more it will be sustainable in the short, medium and long-term.

Will more clients fall into the specialist sector due to the crisis? We fully expect more borrowers to fall into a grey area where many mainstream lenders will be unable to meet their needs as they fall beyond the remit of their existing policy, criteria, and underwriting capacity.

The importance of manual underwriting will come to the fore here, especially considering how many personal and income scenarios will have changed.

Opportunities will certainly emerge for specialist lending advisers moving forward. How will this impact on the buy-to-let market?

Critically, the answer depends on how many specialist lenders make it through this crisis. In the old ‘normal’ we consistently saw a quarter-on-quarter increase in the number of available products in the owner occupier and buy-to-let (BTL) markets. We also saw a consistent, if gradual, reduction in margins.

More choice and keener pricing was mainly driven by specialist lenders; if a significant number of these cannot trade or resume lending then competition will be hit, especially across the more specialist areas of BTL.

In terms of individual lending to BTL landlords, there will be an increased emphasis on cash flow resilience. Voids, and looking at how to cover them, has always been a significant topic; what this event is teaching not only lenders, but also landlords and advisers, is the importance of planning ahead for more severe scenarios.

Focussing on more macro-economic factors, many people will experience constraints around their post-crisis earning capabilities, and will not be able to immediately bounce back to their previous income level, especially those not on PAYE-style employment.

This may hamper some from accessing the mortgage market and result in an even greater reliance on the private rented sector.

Once we get through this – which we will – we may see some conservative growth in the BTL market. What can brokers be doing to better safeguard the needs of their clients in the future? Protection will become more important. Many advisers are already having, or trying to have, these conversations with their clients, but this type of advice will rise even further as the population now fully understands just how vulnerable their incomes are to events beyond their control.

The reality is that incomes are never as certain as we believe them to be, especially for the growing self-employed community.

Responsible lenders have a duty of care to take this into account, while advisers need to ensure their clients have access to the right types of products; this combination will result in a greater emphasis on protection moving forward to protect a range of financial liabilities.