"Within hours of the slight easing of the lockdown we already saw investors, usually portfolio landlords, looking at potential purchases."
We spoke to Paul Brett, managing director of mortgages at Landbay, about why brokers should dissuade their landlord clients from taking a payment holiday and why it's 'survival of the most adaptable', not 'survival of the fittest'.
FR: How is the buy-to-let market coping with the lockdown and the new working conditions?
The biggest challenge for many buy-to-let non-bank lenders has been the cost of funds. Non-bank lenders have no access to the government’s Term Funding Scheme and do not hold retail deposits that they can use to lend as mortgages. This means that these lenders, or their funders, have to bear the wholesale market cost of funds themselves, which rapidly increased at the beginning of the Covid-19 pandemic.
The second whammy was that the funding terms for lenders who use securitisation as a financial means to continue to lend, insist on a physical valuation. So while valuers couldn’t inspect properties it meant that many lenders couldn’t lend, which is why you saw so many buy-to-let - and other short term or specialist lenders – leave the market for a while.
Now the initial shock wave is over, new coping mechanisms have been put in place and many of the lenders which dropped out are coming back again.
In terms of working conditions, the buy-to-let market is facing many of the same challenges as everyone else in terms of staff and colleagues working from home and having to learn to communicate remotely.
It looks likely to be not the fittest who survive but the most adaptable. It’s how quickly one can adapt to the new world in terms of processes and equipment. Those who do it the quickest and most efficiently are the most likely to survive and many younger lenders have an advantage here as their systems tend to be newer and more technically agile.
At Landbay we had a remarkably smooth transition to this change but we have always had technology at the heart of our operation so we were very well set up to do this.
FR: We are in very abnormal lending conditions at the moment, what are you seeing on the ground and what are you seeing the highest demand?
Until surveyors were told that they could once again value properties, most of the demand was for remortgages. There was a lot of interest in our ‘no early redemption penalties’ tracker product, with about half of all enquiries about this product alone. Due to all the uncertainty, it is an attractive option for landlords wanting to keep their options open.
In contrast the other half of enquiries were investors still looking for five-year fixes; people who clearly want to keep their properties for the long term and so want surety of payment.
Within hours of the slight easing of the lockdown we already saw investors, usually portfolio landlords, looking at potential purchases. Those either looking to purchase just before the lockdown, and others weighing up their options who clearly want to capitalise on any dip in house prices that may happen over the next few months.
FR: What advice you would give to brokers over the coming few weeks?
It is so important to stay in touch with your customers. While the lockdown may be easing now, it may not stay that way so help them to prepare for what the future may hold.
If house prices do dip some investors will want to capitalise on that. If lockdown rules are tightened again, your clients need to be prepared. Where possible, dissuade your landlord clients from taking a payment holiday unless they absolutely have to. It needs to be made clear that these ‘holidays’ are not ‘holidays’ at all, they are actually just deferments. The money still needs to be paid back and taking these breaks could increase their monthly payments afterwards.
Payment holidays may also affect a client’s risk rating across their portfolio making it harder for them to remortgage or to take another mortgage out. If it is absolutely essential, as tenants are not paying and they cannot cover their mortgage in any other way, then clearly it is necessary, but in any other circumstance it is important to make it clear that payment holidays may well count against them in the long term.
Thinking of a broker’s own business, if you do find yourself less busy than you were, then it’s a good time to get your business in order, to look at how you market your business, get new customers and keep in touch with existing ones. It may well be time to explore those digital options that you never got around to in the past.
It is also a good time to examine whether you are really making all the protection and GI sales that you can be to maximise all the income streams available to you.
FR: What trends do you expect to see over the next six months?
We expect a slight drop in house prices in the short term which will see landlords potentially look to expand their portfolios.
Some potential homeowners will find it harder to get a mortgage than they would have done so will rent for longer leading to stronger demand from tenants.
Interest rates are likely to stay low for many years, while rents tend to hold up quite well, which could increase yields and may lead to more demand from buy-to-let investors.
In a wider context, we are likely to see use of technology become more normal, seamless online applications through to completion become the norm and increased use of electronic signatures. The positive is these developments may well speed up the mortgage process forever.
Relationships are everything however. BDMs will still want individual contact with brokers and vice versa, so BDMs may well become experts in video-conferencing as, even when the lockdown is lifted further, are brokers really going to want a lot of BDMs visiting them?
Once people have got used to this way of working you have to question whether the use of big city centre offices has had its day. Now people and companies realise that you can work as effectively from home, people may not want to travel in, preferring to work around school runs or spend more time at home. Although, many of us in Landbay can’t wait to get back into the office!
FR: If you could see one headline about financial services this year, what would it be?
"Buy-to-let market booms as pent up demand realised and government extends Term Funding Scheme to non-bank lenders".