New BTL lenders must be careful of pre-crunch fever


October 7, 2013

Bob Young is Managing Director of CHL Mortgages


The recent Financial Services Expo appears to have generated a significant amount of debate and news around the industry with many players using it to launch new offerings or outline their plans for the future. In terms of the buy-to-let market there is clearly a positive feeling to the market at present, so much so that I believe Alan Cleary of Precise announced that 2014 would see a number of new lenders entering the buy-to-let sector because there was more margin to be made here.


There are many reasons to be involved in buy-to-let however one hopes that any new entrant is not just seeking to make a quick buck because, quite frankly, the short-term gains are bound to be outweighed by the long-term losses. What has tended to happen in the past is that lenders have jumped into buy-to-let with little or no grasp about what it takes to lend responsibly and have been forced to leave quick-sharpish with their tails between their legs when they were found out.


When I hear of new lenders about to “make a splash” in buy-to-let part of me begins to shudder because this tends to mean either the start of significant price cutting or loosening of criteria and running up the risk curve like the credit crunch never happened. Some people who worked and failed after the world’s financial crash appear to have very short memories about what responsible lending should look like and when they work together with those who have no experience of the mortgage market it can produce a lethal cocktail.


I’m all for greater competition and choice in the sector but not at the expense of offering buy-to-let loans to every Tom, Dick and Harry who think they should have them for little or no skin in the game. Ensuring that landlords have a minimum of 15/20/25% deposit or equity, plus strong criteria around rental cover requirements is particularly good practice and we should maintain that even in the face of new entrants who may be looking to make a name for themselves. Demand for buy-to-let loans is strong and finance is easier to access but we should not open ourselves up to a charge that we are intent on rushing headlong towards a time when some lenders dished out buy-to-let mortgages like they were going out of fashion.


I have worked in this market for a long time and I do get the sense that some market participants could start to think they’re invincible again. Already I hear of a return for the ‘property club’ sector which did such incredible damage to our market back in those pre-2007 times. Yes we can all be positive about buy-to-let but we must guard against the return of the speculator who will look at rising house prices in some areas and think a return for being a landlord comes via increased capital values rather than a long-term rental income approach. Many of the problems we encountered five or six years ago were as a result of this speculative approach and both existing and new buy-to-let lenders should be very cautious about the borrowers they lend to and their intentions.


As stated competition is to be welcomed in the marketplace; advisers and their clients can clearly benefit from a vibrant market which offers choice, innovation and variety. However we all have a duty to ensure that type of market is responsibly participated in and that it remains sustainable over many years. There is much talk about landlords viewing their property investments over the long-term and all those active in buy-to-let lending should also listen to this advice. We want a sector that maintains its purpose and delivers over many years to come not push price, risk and criteria to the nth degree only seemingly interested in the very short term. This market should not be treated like it’s a flash in the pan.

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