Brokers are turning away potential buy-to-let clients because the property they want to borrow against is unmortgageable, but there could be options which they’re missing.
Bridging lender Fincorp says buy-to-let is increasingly the exit for short-term finance with a growing proportion of borrowers taking a bridge to fund refurbishment projects before remortgaging onto a traditional buy-to-let product and letting their property out.
In the past Fincorp says the majority of its borrowers used short-term funding to finance property development projects ending with a property sale. But this balance is now shifting with a much stronger demand coming from property investors and landlords as well as property developers.
The latest figures from the Council of Mortgage Lenders revealed that overall for 2013 buy-to-let gross lending totalled 160,900 loans, up 23% compared to 2012. These loans totalled in value £20.7 billion, which was an increase of 32% compared to 2012. Of this, the total buy-to-let lending for house purchase was 82,930 loans, an increase of 19% compared to 2012, and the total value of these loans was £9.3 billion, a 26% increase compared to 2012. Buy-to-let remortgage lending showed the highest proportional buy-to-let growth, an increase of 29% compared to 2012 bringing the total to 76,260 loans. The loans valued at £10.6bn in total, an increase of 39% compared to 2012.
Matthew Anderson (pictured), director at Fincorp, said: “The bridging market has changed a lot in the past five years and we’re seeing more and more of our clients use buy-to-let as their exit from a short-term loan. The CML’s buy-to-let figures show a strong recovery in that market and we’re convinced that bridging is partly responsible.”
Anderson believes there has been something of a “perfect storm” with money markets starting to move again, freeing up funding for buy-to-let lenders themselves. And with a strong house price recovery – particularly in London and the south east – there is a distinct trend up the buy-to-let risk curve with loan to values creeping back up.
The lender says that already 2014 has seen several key moves in the buy-to-let market that bode well for the coming year. Specialist buy-to-let lender Paragon Mortgages said in its latest results it saw an increase in mortgage lending of 207% during 2013, lending a total of £140.2 million.
Criteria and the number of products is also improving. Mortgage Trust, part of Paragon, has recently relaunched 80% loan to value deals on fixed rate and tracker buy-to-let products marking a significant upturn in confidence. And in early February Post Office returned to the buy-to-let market after sitting out for more than two years.
But RICS’ January Residential Market Survey said a shortage of homes coming onto the nation’s housing market is seriously hampering growth and pushing prices higher in many parts of the country.
This is where Fincorp believes bridging can be a critical link. “There’s a lot of housing stock on the market that doesn’t match up to the standards buy-to-let lenders require – maybe there’s no bathroom or the property lacks a proper kitchen for example,” says Anderson.
“This will put a black mark against it when the lender is underwriting a deal and landlords can find themselves being rejected for a traditional buy-to-let loan. But brokers can really help if a client finds themselves in this situation – short-term finance is the ideal solution for this sort of project. Once the refurbishment is done clients can then remortgage off the bridge onto a buy-to-let loan.”
Anderson says the advantage of that is also that usually the value of the property goes up after the work has been done meaning clients can get a better deal on their buy-to-let loan as the loan to value drops. And he adds: “Brokers get two bites at the cherry as well, earning a proc fee for both loans.”
Fincorp also says the trend is likely to continue with a rampant buy-to-let market likely to send the bridging sector into overdrive in 2014. Recent research from BM Solutions and BDRC’s Continental Landlord Panel suggests a third of landlords are looking to expand their rental portfolios in the next 12 months. Anderson says: “While no one is quite sure of the overall size of the bridging market, it is without doubt increasing. We are busier than ever and expect the improvement in the buy-to-let sector to support further growth in 2014.”
