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Re-engineering buy-to-let: How lenders are shifting from a shrinking market


The buy-to-let sector is undergoing a transformation as specialist lenders and brokers are increasingly moving away from a shrinking market and into residential mortgages.

The Council of Mortgage Lenders believes the size of the buy-to-let market will fall this year and next from the £40bn level seen in 2015 and 2016. Some commentators believe the sector could contract even further, to the low £30bn mark in 2018.

The CML’s most recent lending figures show landlord borrowing was down 10 per cent year-on-year at £3.2bn and 21,000 loans for November.

This is mainly due to the Prudential Regulation Authority’s requirement for tougher stress tests on landlords, plus reductions in tax relief and a 3 percentage point stamp duty surcharge on second homes.

So what impact is hardline policy and decreasing demand having on the buy-to-let sector, and how is the market adapting to the new environment?

First mover advantage

Several buy-to-let only lenders have changed tack recently and announced moves into residential lending.

Last week, Paragon Group announced it would move into specialist residential lending after Foundation Home Loans said it would diversify later in the year.

Last July, fellow specialist buy-to-let lender New Street Mortgages also announced plans to move into residential lending.

Industry experts think more lenders will have to follow suit.

Coreco director Andrew Montlake says the future will see many specialist buy-to-let lenders diversify their business models, although some will remain unchanged.

He says: “Some lenders will think they won’t be able to reach the level of lending they need with just buy-to-let any more because the competition for a smaller amount of business will be too great.

“So they will move into the specialist residential space, although perhaps some had plans to do that anyway.”

London Money director Martin Stewart says: “Many lenders will have to diversify. All those buy-to-let lenders will be fighting over the same market share.”

Trinity Financial director Aaron Strutt says: “Most of these types of lender are run by people who have worked at big organisations in the past. They know how the market works and how to spot opportunities.

“But obviously buy-to-let rental calculations are probably going to almost force them to look into different areas.”

Vantage Finance managing director Lucy Hodge also thinks diversification is likely.

She says: “The sensible business decision for any market facing headwinds is to make sure you are as diverse as possible.”

But she adds the industry should not become too negative about the future of buy-to-let.

She says: “Part of me thinks that some of the coverage this will get will convince people there is a massive storm coming, when in truth none of us really knows.

“There is clearly going to be a plateau or a drop. I don’t think the market can continue at the same level of growth that it has done but, if it is not as bad as some think, then at least businesses have made themselves stronger.”

A rosy future?

Not everyone is convinced the end is nigh for buy-to-let lenders. Mortgages for Business and Keystone Mortgages managing director David Whittaker believes quality specialist lenders are in a better position than larger, mainstream companies to deal with a market shift towards lending to landlords via limited companies and other changes.

Many lenders will have to diversify. All those buy-to-let lenders will be fighting over the same market share

He says: “The question is if or when the big players will be able to transact in the limited company buy-to-let space. Will they be ready to underwrite for landlords who own four or more buy-to-let properties in either their own name or limited company names?

“For specialist lenders that do both personal and limited company buy-to-let, the market was already marching our way. Is it now going to march our way in double-quick time?”

Stewart says the need to diversify affects mortgage brokers as well as lenders.

He says: “Buy-to-let specialist brokers will have to diversify too. If you have one trick up your sleeve, my advice is to get another sleeve.”


The Buy to Let Business managing director Ying Tan is bullish about the future for buy-to-let specialist brokers.

He says: “In many ways it will be better for specialists. Everybody is going to need a buy-to-let specialist broker more than ever before. Generalist brokers don’t have the knowledge, expertise and relationships to keep apace with the changes going on in the buy-to-let arena. So that should help specialist brokers.”

But Tan says a prudent buy-to-let only broker will still need to expand its operation into residential.

He says: “We are also going to write more residential business. But is that because we are diversifying, or is it simply because we want to continue to grow in what will be a flat market? I’m a businessman, and to grow I
either need to grab market share or look at new territories.”

Expert view

Styles-Gary-2007When regulators look at these lenders, if they are very specialist in one particular niche, then that does provide some risk issues. I am sure the move from buy-to-let into residential is portrayed by the lenders as a growth opportunity for them. But let’s be frank, a lot of them have pushed hard into the buy-to-let sector because it was profitable and low risk. So why would you want to enter a market that is very competitive and apparently less profitable? That seems a little odd.

The other aspect that has been going on is the area of capital weighting in terms of the portfolio positions the lenders are on. There has been a lot of talk about the buy-to-let capital weightings under the Basel rules being quite negative. It is more to do with some of the more specialist areas of funding, such as the ones where firms provide development finance for buy-to-let developments.

The risk capital weighting for that stuff is very, very high. So it is difficult to see why the timing is where it is now because this has been coming down the tracks for the last two years, and lenders know that, and they know the risk weights will be shifted against them.

But this is more of a portfolio play. When you turn up to the regulator and you are a pure play buy-to-let lender, then the questions about the risk aspects of that will be very different than if you are more of a balanced player.

Firms have probably also learned from experience. There are a few building societies that are very much prime lenders who have done an awful lot of buy-to-let over the past few years that are also being asked very difficult questions about the buy-to-let portfolios they have.

All this makes me wonder if this is a theme that is coming through from the regulator. I do not think there has been a transformation in the market of people saying residential does look very attractive now. It is a combination of tougher Government controls on buy-to-let and the regulatory push that is going on.

Gary Styles is director at GPS Economics

How the Government and regulators cracked down on landlords

July 2015 – Government reveals plans to hike landlords’ tax bills by cutting mortgage interest tax relief to 20 per cent between 2017 and 2020. This does not apply to limited companies, leading to many landlords buying houses through special purpose vehicles

November 2015 – Government announces a 3 per cent stamp duty surcharge on second homes and buy-to-let properties, which came into effect last April

May 2016 – Bank of England governor Mark Carney says buy-to-let is risky and the Bank is monitoring it closely

September 2016 – The Prudential Regulation Authority confirms it will bring in two waves of tougher underwriting standards for buy-to-let lenders in 2017

January 2017 – Buy-to-let lenders begin to roll out the PRA’s changes, including assuming a minimum borrower interest rate of 5.5 per cent for the first five years of the loan.

September 2017 – Buy-to-let lenders to enact the second wave of PRA changes, which include lenders considering future interest rate rises for at least the first five years of any buy-to-let loan



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Let us hope that the Council of Mortgage Lenders is correct in believing the size of the buy-to-let market will fall this year and next from the £40bn level seen in 2015 and 2016. Hopefully the BTL sector will contract even further, to below £30bn mark in 2018 and halve by 2020. As this will at last allow millions of young people to enter the housing market as a huge supply of BTL properties will force property prices to fall by around 20%.

    In addition it will start a transfer wealth from the “baby boomers” (my generation) to the “millennials” which is much needed as the majority of this generation have been saddled with debt through student loans and have been frozen out of the housing market due to the tax payer subsidy on buy to let mortgages which David Cameron and George Osborne had the foresight to abolish.

    • It is estimated that a third of the PRS is mortgaged, so whilst these changes will effect the mortgage industry it may not have such a large impact on the growing PRS that is being suggested.

    • The BTL property market, by which I mean the actual properties themselves, are not juxtaposed with the FTB market, and never have been. The idea that if landlords in the PRS are forced to offload their properties then this will make lots of property available to FTBs simply does not compute. Between 1 and 3 rungs of the property ladder lie between the typical FTB property and the typical PRS property in any area of the UK that you might care to mention, with the overwhelming average being two ‘rungs’. What the idiots in the Government have actually done is to legislated to reduce the supply of rented housing and increase rents in what remains. To sort the problem out properly and permanently, they have to build about 1m affordable houses asap just to catch up……just to plug the gaping hole they created by allowing the UK population to grow by 5% since 2004 without doing any strategic planning whatsoever for more housing. And let’s face it, we already had a housing shortage to start with.

      Blairs’s so-called ‘Government’ also failed to do any strategic planning to prepare our schools, or our NHS for the entirely predictable arrival of an extra 3,500,000 (3.5 million) people. In the event, despite the fact that this was not exactly rocket science, it was beyond the capability of anyone in that Government even to speak of the issue, let alone act to address it. Hence, all three of our most highly-prized social certainties……the ‘jewels in the crown’ of our civilised democracy ……housing….education….healthcare……have all been brought to their knees.

      It is completely idiotic to blame private landlords, and completely immoral to legislate against them. It is crystal clear where the blame lies. The principal causal factor in the massive change in the UK’s socio-demographics during the last few years of the ‘noughties’, was that 8 countries were allowed to join the EU in 2004…..virtually simultaneously. In retrospect, it is difficult to imagine who decided that this was a good idea, or why. For certain, and de minimis, it reveals a tendency for the EU to put their mantra above their common sense.

      The Blair government could have made a case for less haste, at least. Failing this, the Blair government could have predicted the tsunami of Eastern Europeans who would (entirely understandably) enter the UK within weeks or months of joining the EU, and they could perhaps have requested the right to slow down the flow to a manageable level.

      But above all, that government had a fundamental responsibility to ensure that the predictably significant numbers of immigrants from the 8 new member states admitted in 2004 would have no detrimental effect on the standards of our key public services. The Blair Government failed in every respect, and failed completely.

      Tony Blair has a lot more than the Iraq war to answer for.

  2. Absolutely agree Colin but they didn’t go far enough as you can’t get tax relief for loans to buy actual pieces of art, fine wines or classic cars for investment purposes so why should you get any tax relief at all for an investment property. I know many people will say the goalposts are being moved and how unfair it all is but all long-term planning (eg pensions) is plagued by ‘layers of simplification’ being added by successive governments and, when you look at the amount of tax that is being lost now and how much that will increase by if interest rates rise, I am surprised that this benefit hasn’t already been scrapped. As for the property company route, focussing on Land Registry records and how such entities are taxed will ensure tax will be levied!

  3. @CDL you could get tax relief on expenses, including finance costs if the art, fine wine, car etc was an income generating business. That is the point.

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