Buy-to-let watch episode 2
Liz Syms, CEO and Founder of Connect Mortgages
In our initial instalment of Buy-to-Let Watch, we delved into the topic of “Jubilant Home Thoughts From Abroad.” In today’s episode, “Buy-to-Let Watch Episode 2”, our focus shifts to the importance of landlords meticulously choosing their lenders.
Many professional landlords share a common goal: expanding their property portfolios. However, the challenge often lies in securing the necessary capital for additional acquisitions when unlimited funds for deposits are not readily available. To overcome this hurdle, landlords frequently turn to their existing property portfolios as a potential source of capital.
A notable trend among landlords is the strategic targeting of properties that offer opportunities for capital growth through refurbishments or permitted development. This approach allows them to unlock equity within their portfolios, paving the way for subsequent purchases. The process of capital raising against this equity typically involves three primary avenues: remortgage, further advance, or second charge loan.
An increasingly popular choice among landlords is opting for five-year fixed rates, aiming to maximise affordability and provide a level of financial security. Even those not driven by the need to enhance affordability find appeal in the stability and risk mitigation offered by fixed-rate options of this duration.
It’s essential to note that the decision to remortgage comes with potential drawbacks, particularly due to heavy early repayment charges associated with many fixed-rate products. To address this concern, some lenders, such as Godiva, have introduced five-year fixed-rate options that come with no early repayment charges. In contrast, others, like Precise and Foundation, offer five-year products with early repayment charges applicable only during the initial three years.
Despite these limited options, landlords must carefully consider the implications of remortgaging for capital raising, given the associated costs. For those looking to explore alternative avenues, a further advance or second charge loan emerges as a viable option for securing additional funds. As the landscape of property investment evolves, landlords must stay informed about the various financial tools available to facilitate the strategic expansion of their portfolios.
Buy-to-let watch episode 2 | Collaborative approaches in the property financing
A notable practice involves the primary lender, typically a high street buy-to-let (BTL) institution, granting approval for a second charge loan. In the conventional BTL market, it’s customary for such lenders to extend further advances and, in many instances, endorse second charges. Notable players like BMS and TMW boast additional advanced options and the capacity to grant consent for second charges.
However, the scenario shifts when dealing with specialist lenders, where a divergence in practices becomes evident. Among the 13 specialist lenders examined, only Kent Reliance emerges as a unique player capable of providing both a further advance and approval for a second charge. This nuanced differentiation highlights the varied landscape within the lending sector, emphasising the need for nuanced approaches and collaboration between lenders to explore second-charge opportunities in property financing fully.
Buy-to-let watch episode 2 | Exploring limited options for further advances in property investment
In the realm of property investment, the scope for obtaining a further advance is constrained, with only Aldermore and Paragon standing as potential lenders willing to entertain such a possibility. However, both shy away from consenting to a second charge, narrowing the options even further. On the flip side, Precise and Foundation are amenable to a second charge but fall short in offering further advances.
A recent survey indicates that a staggering 70 per cent of lenders are devoid of either option, adding complexity to landlords’ capital-raising endeavours.
Crucially, for landlords contemplating future capital-raising endeavours post-purchase, understanding the nuances of their plans is imperative in crafting sound recommendations. For instance, if a landlord envisions capital-raising two years later and the adviser has advocated for a five-year fixed rate with early repayment charges from a lender incapable of providing further advances or consenting to a second charge, complications may arise.
This situation could potentially hinder the landlord’s planned capital-raising or necessitate dealing with early repayment charges and the complexities of remortgaging.
The significance of documenting such conversations cannot be overstated. If advisers fail to record discussions about the limitations on further borrowing, they open themselves up to potential complaints. Thus, thorough documentation safeguards against unforeseen challenges in the dynamic landscape of property investment.
Buy-to-Let Watch Episode 2 | The impact of specialist lenders
As we end our buy-to-let-watch episode 2, saving the best for last is only fitting. Specialist lenders play a pivotal role in the market, providing an extensive array of criteria options to assist landlords in navigating the complexities associated with diverse property types and unique circumstances. Nonetheless, it is crucial for advisors to be cognisant of potential limitations.
We strongly advocate for buy-to-let (BTL) lenders who currently do not provide additional advances or consent to second charges to evaluate these offerings thoroughly. This consideration becomes especially significant when devising strategies to attract business from portfolio landlords.
In broadening the horizons of the real estate market, specialist lenders emerge as key contributors, offering landlords a broader spectrum of criteria options tailored to accommodate various property types and individual situations.
While recognising the positive impact of specialist lenders, advisors must acknowledge and comprehend any inherent constraints. Specifically, my recommendation is directed towards buy-to-let (BTL) lenders that presently do not extend further advances or approve second charges. This aspect warrants careful consideration, especially when formulating approaches to entice business from portfolio landlords.
The market landscape is enriched by the distinctive contributions of specialist lenders, who play a pivotal role in widening the spectrum of criteria options available to landlords dealing with diverse property types and unique circumstances.
Despite their positive influence, it remains essential for advisors to navigate potential limitations judiciously. I strongly emphasise the importance of urging buy-to-let (BTL) lenders without existing provisions for additional advances or second charges to assess these aspects thoroughly. Such consideration becomes paramount when strategising ways to attract business from portfolio landlords, adding a layer of strategic insight to the financial landscape.
We reached the end of our publication on “Buy-to-Let Watch Episode 2 | Why Landlords Should Select Lenders Carefully | 2019”; until next time, stay Connect!