Why is Financing so Challenging for First-Time BTL Buyers?

By James Hamblin, Business Development Manager, KSEYE

In recent years, the property finance sector has become increasingly diverse. The pandemic has largely accelerated this trend, with specialist lenders providing alternative products to the risk-averse and less flexible high-street banks.

It is a trend to be celebrated. Brokers and borrowers now have greater access to financial products to meet their individual needs. However, there remain gaps in the market, with some types of buyers not adequately supported. First-time buy-to-let (BTL) investors are a prime example.

Sustained growth in the BTL market

More stringent regulation of the BTL market had led some to predict that this avenue of investment would diminish in popularity. The introduction of a 3% surcharge on stamp duty for second property purchases and curtailing of mortgage interest rate relief were undoubtedly a blow for landlords and will have deterred some from entering the BTL space.

However, largely speaking these reforms have done little to dampen enthusiasm for BTL investment. Arguably, this was always likely to be the case – a 3% surcharge on top of a 15% higher-rate payment will do little to dissuade determined investors, and the dependable long-term yield of lettings assuages the pain of increased running cost in taxes. And there are simply very few assets that promise the same long-term capital growth.

In 2021, the BTL market has remained in rude health. There are now an estimated 5 million private rented homes in the UK, considered to be an all-time high. However, the average number of properties per landlord has also increased to record highs.

However, while the appeal of BTL remains, it would be fair to say that reforms have discouraged landlords with smaller portfolios, or those looking to enter the market for the first time. For the latter group, access to finance has been another complicated issue.

The challenge for new BTL landlords

Lenders of any type like to feel assured that they are lending to a competent, dependable individual. This is particularly the case with BTL purchases, where the lender must feel confident in the ability of the borrower to manage the investment effectively.

As a result, some lenders – including both banks and bridging firms – are reluctant to offer BTL loans to first-time landlords: for lenders to look favourably on a first-timer’s application to become a landlord, they should already be a landlord.

While a degree of caution is natural – and, in many cases, sensible – it overlooks a large number of would-be BTL investors with healthy finances and credible applications, which is to the detriment of the market as a whole. As a minority of landlords accumulate increasingly large portfolios of property, the limited competition may result in high rents and lower maintenance quality.

The important role of sense checks for borrowers

In my experience, allowing new blood into the market is a low-risk prospect. Managing and maintaining a single small property let is well within the capabilities of most people.

But it remains important for lenders to implement sense checks as part of the application assessment. And brokers and prospective BTL investors should similarly bear these in mind.

For instance, it can be easy to identify cases where managing a property is likely to be too challenging for the applicant. A common example will be someone based in London looking to break into BTL investment and choosing a relatively inexpensive property in the North East. In this case, the individual’s knowledge of the local area and market may be lacking, while maintaining the property to the satisfaction of a tenant will be difficult at such a distance.

In other cases, sense checks can help identify dishonest actors. Most lenders, for instance, would raise a red flag on an individual whose primary residence was a single bedroom flat but who was seeking a BTL mortgage for a much larger property with better amenities. As BTL products are competitively priced, it can be reasonable to assume this individual would be likely to move into the larger property and rent out the smaller one. If an applicant residing in a large property were to seek a BTL mortgage on a smaller property, this would appear more sensible and dependable. If these two applicants were of equal financial standing, most lenders would rightly be more inclined to offer financing where the borrowing appears rational.

It is likely, given its resilience through the difficult months of the pandemic and resurgent performance in 2021, that the BTL industry will continue to attract high demand among investors. As such, lenders should consider showing greater flexibility in considering the merit of new landlords and favour sense and reason over simplistic financial assessments. Caution will always have a place but creating high barriers to entry risks stifling change in the BTL space.