In our market, experience counts for a lot. When we were setting up Fleet Mortgages it was always the case that, while we certainly wouldn’t be ostracising ‘amateur landlords’ from our product range, our core focus was always going to be on the professionals – and I don’t mean Bodie & Doyle.
This means that we tailored our proposition towards those who invest in property as their day job, which involves looking at their chosen vehicles they use to do this such as limited companies and also means we lend on properties beyond the standard flats and houses (or variations thereof) such as houses in multiple occupation (HMOs). We call these experienced landlords and, certainly when it comes to limited company and HMO lending, it’s fair to say they have not been overly blessed with a huge variety of product options in recent years.
The reason for this is prior to our launch buy-to-let lenders, with perhaps one notable exception, have tended to focus on what Tony Finlason and Steve Long and of our distributor partners, Professional & Commercial, have called ‘bog standard’ houses and flats. Tony and Steve have been working with professional landlord clients for many years and they freely admit that a lack of product options and, dare we say it, a lack of understanding about Limited Company and HMO lending has held back their clients from raising finance and growing their portfolios.
So, what is the core reason for overlooking these sub-sectors? Again, Tony and Steve, are blunt – it’s the buy-to-let ‘lenders’ understanding of risk and the fact they believe this type of lending to be higher-risk than the ‘bog standard’ buy-to-let lending they currently do. What is most surprising, if you actually delve a little deeper into these areas, is that actually the opposite tends to be true.
Professional & Commercial give the following HMO example. If a salaried individual has one or two investment properties and a void occurs, there is immediately pressure on that individual to service the debt. Whereas, with for example a HMO of six rooms, if two rooms are void, there is still income from the remaining four. Additionally HMO landlords tend to have a much higher number of properties than the ‘amateur landlord’, which spreads the void risk even further and, let’s not forget, by their very nature HMOs also tend to produce a much higher yield than your bog-standard properties.
It’s somewhat surprising therefore that when asked the question, “Who would you prefer to lend to – the amateur with no experience who is completely new to buy-to-let or the seasoned professional with a portfolio who has spread his or her risk and is in this for the long-term?”, the answer from most lenders is still the former. Which is where Fleet Mortgages enters the picture and where we started to see that this market niche could be much better catered for by those who are immersed in the whole sector and understand the nature of the professional landlord.
As Tony and Steve have been vocal in pointing out to us, the demand for this type of finance is undoubtedly out there – indeed they believe many landlords have effectively been “sitting on their hands as although they would wish to expand their portfolios, they are either unwilling to pay the rates the challenger banks are seeking, or the capital and interest repayments the high-street banks require”. It’s another reason why we have realised that competitive pricing was a must and if we could get the pricing and our service levels right, then we would see a good flow of quality business from established landlords.
Unfortunately, for advisers and their limited company/HMO landlord clients, they shouldn’t expect our launch to act as the catalyst for a flood of lenders taking a similar approach. Tony and Steve believe the shortfall in understanding at most buy-to-let lenders will mean these areas remain off limits for the foreseeable future – although they do believe that as bog-standard buy-to-let margins continue to get squeezed there could be some movement towards these sectors from, for example, smaller lenders and/or building societies.
However, in the short-term it is expected that the true specialists within this specialist market will be the go-to providers. It may be disappointing that there is not more competition and choice however at least there is now more options than just six months ago and one would hope that other lenders will eventually be able to get their heads around these sectors and can forge a proposition which works for a highly important, often forgotten, group within the private rental sector.
Bob Young is chief executive officer of Fleet Mortgages