Complex buy to let comes in all shapes and sizes and advisers will need to keep their knowledge up to date, Ellie Duncan writes.
Advising on buy-to-let is a specialist area for most intermediaries, but recent reforms have complicated the market somewhat.
At the end of September this year, the Prudential Regulation Authority (PRA) introduced new underwriting standards for portfolio landlords, on top of more stringent affordability rules which came in on 1 January 2017.
Last year, the BTL sector was subject to a 3 per cent stamp duty surcharge on additional properties and in 2020 there will be a phasing out of income tax relief for landlords.
In themselves, these have helped to make buy to let more complex. But there are specific property types that fall into this particular category.
Charles McDowell, commercial director, mortgages at Aldermore, defines complex BTL as: “The colloquial term that describes the gap between standard buy-to-let properties i.e. standard flats and houses and pure commercial property.
“It is widely recognised to cover things, such as homes of multiple occupation (HMOs), student lets, multi-unit freeholds or portfolios held in limited companies.”
Our top tip for advisers is to keep in touch with their mortgage club or network – Jane Benjamin
Advising on this area of the market may not be suited to all financial advisers but for those are interested in offering it as a service, they will need to keep their knowledge up to date.
Liz Syms, chief executive of Connect Mortgages says: “Advisers first need to consider which areas of mortgage advice interest them the most and then invest time in building their knowledge, so they are very competent in that area.”
She suggests: “An adviser may feel he/she is competent with residential mortgages, including right to buy, shared ownership, adverse credit, guarantors. But when it comes to complex BTL with limited companies, HMOs, rental stress tests, etc. they feel out of their depth.
“They can still, however, take advantage of the opportunity by referring their client to another broker who specialises in BTL.”
For those intermediaries who want to specialise in complex BTL, there are a number of ways to keep up with the reforms.
Ms Syms points out that being aware of the latest changes in the market is very important.
“There are a number of good events being run around the country that brokers can attend to get this type of education,” she notes.
Jane Benjamin, head of relationship management at Sesame and PMS, believes the new underwriting requirements in particular are a challenge for advisers as these are based on each lender’s individual interpretation of the PRA’s guidelines, along with their appetite for writing this type of complex business.
Providing complex buy-to-let solutions to your landlord clients is going to develop and deepen those relationships – Charles McDowell
“What this means in practice for advisers is that each lender may ask for slightly different information, such as portfolio statements, business plans, cashflow forecasts and statements of assets and liabilities.
“At times like these our top tip for advisers is to keep in touch with their mortgage club or network, because it is simply not practical for advisers to compile criteria and requirements for every lender themselves,” she insists.
Ms Syms adds: “To get up to speed with lender criteria, it goes without saying that they can tap into the huge resources from lenders, which includes their websites full of information and keen lender business development managers willing to visit and deliver training.
“There are also new tools in the market such as Knowledge Bank, which help brokers to search complex criteria. Brokers can also benefit from partnering with a specialist BTL packager.”
The good news is that lenders are launching more products designed specifically for landlords, but there are many things advisers will need to do to work out which is the most appropriate product for their clients.
Mr McDowell notes his top tips for dealing with complex BTL cases are:
- Check your clients’ portfolio size; some lenders have limits on the number of properties and/or the value of them. This is even more prudent following the additional requirements as a result of the PRA changes to buy-to-let portfolio underwriting standards.
- For limited company applicants check whether the lender requires a Special Purpose Vehicle (SPV). Whilst more and more lenders are offering products and solutions for landlords opting to trade via a limited company structure, it’s wise to check their criteria as some require it to be the company’s sole activity.
- Consider using a packager – there are many specialist packagers out there who can act as the link between lenders and the brokers, processing the application on your behalf. They often have the expertise to deal with these sorts of complex cases and you may find they have access to a wider range of specialist lenders than you do yourself.
Weighing the options
Ultimately, advisers need to decide whether they are going to advise on this area of the market at all as it will involve a lot of extra work.
“Financial advisers should consider whether they want to handle complex BTL cases because they take a great deal of understanding, more time and paperwork to place with the right lender – in the most part, for no extra recompense,” cautions Steve Olejnik, chief operating officer at Mortgages for Business.
As far as he is aware, only one provider has upped its procuration fee to reflect the increased workload that brokers are having to undertake since the PRA introduced stricter underwriting guidelines.
“Those who choose not to deal with more complex cases should align themselves with a specialist buy-to-let broker, particularly one that has direct access to all of the specialist lenders,” he suggests.
But Donna Hopton, director at Cherry, voices her concerns around advisers expecting to be tax experts in this area.
“Perhaps the issue here is whether it is possible for advisers to keep up with tax changes and whether it is their responsibility anyway, and if not theirs, whose [responsibility] it is.
“To protect themselves, advisers without appropriate tax related qualifications need to steer clear of tax-related issues,” she acknowledges.
But Mr McDowell sees where the opportunity lies: “Providing complex buy-to-let solutions to your landlord clients is going to develop and deepen those relationships which can only be a good thing.”