Buy to Let
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We need more innovation for Buy to Let Mortgages
A recent poll by the National Landlords Association found that three-quarters (74 per cent) of landlords agree that the buy to let market needs greater innovation.Â This is a real kick in the teeth for the product specialists who spend hours creating buy to let products to meet landlord requirements.Â
So what types of innovation do Landlords want? Certainly high up on the list is a product which allows a landlord to buy a tired property, add value to it by doing some light refurbishment, and renting it out at an enhanced rate generating a higher yield.
One of my consultants came to me recently with a perfect example.Â It was a two bed apartment in Richmond London. The kitchen and bathroom needed replacement (but was useable), and the walls were covered in 1970s wallpaper which needed stripping and a fresh lick of paint.Â When I saw the property particulars I thought this is exactly the sort of property I would buy. It was in a good location, close to local amenities and transport making it very attractive to working professionals looking to rent.Â But above all was at a price which allowed value to be added to the property.Â Spending around 10-15k on the property would easily have added an extra 50k on the value at no more than 4 weeks work. Â After sending the link to a number of lenders most thought that it would not be suitable security, and the consultant struggled to get funding despite the applicant being an existing landlord with impeccable credit rating and having a well-paid job.
The lack of products in the market that cater for this type of property is disconcerting given the commercial rationale behind the acquisition.Â There is a fine line between these properties being certified as â€śfit to letâ€ť and habitable or not. The landlord is at the mercy of the surveyor and his opinion with varying guidance from lender to lender.Â Brokers find inconsistencies between surveyors frustrating especially if the property is already rented out.Â Generally what happens is the property will be declined or a full retention is put in place which will more often than not kill the deal.
When landlords scour Rightmove for an investment property they always look for a property where value can be added to increase the selling price and increase equity to cushion any price falls.Â They will look for words like â€śmodernization requiredâ€ť or â€śproperty needs updatingâ€ť this gives them more scope for negotiation and a better price.Â It is an old clichĂ© in property but you make money when you buy not when you sell.
A Buy to Let mortgage means exactly that. The property is to be bought and let out immediately. For those transactions that donâ€™t meet this criteria, there are few alternatives.Â Few lenders offer a light refurbishment product.Â I understand that the increased cost of processing in the extra underwriting involved is a factor. However, if this cost is passed onto the client via a higher rate and higher fees most landlords are willing to accept this. At the very least they will have an option.Â Similarly, if LTV is reduced to cater for the initial void this is also likely to be accepted.Â The other challenge is complacency. Lenders are already hitting their targets with their core range so why innovate with a product that only complicates things?
The mortgage world we operate in is no longer driven by sales and volume but by risk and regulation. In the current economic climate product designers have become increasingly attentive to risk stifling further product innovation.