According to the latest figures from the Council of Mortgage Lenders, buy-to-let accounted for 18% of all mortgages in the first quarter of 2015. It’s a remarkable comeback for an industry hit so hard during 2008’s credit crunch there were fears it may not recover.
The success of the sector has naturally resulted in opportunities across the wider industry, most notably the secured loan sector where landlords are seeking second charges in order to boost their portfolios.
Traditionally a landlord looking to raise funds to pay the deposit on a new property for his portfolio would look to a remortgage but with many on attractive deals with their current providers they’re starting to look for alternative solutions. And the secured loan sector, currently experiencing a boom itself, is reaping the benefits.
“We have a 3% market share of the buy-to-let market and approximately 60% of new business is remortgage rather than purchase which is consistent with CML figures,” explains Alan Cleary, managing director, Precise Mortgages.
“Landlords are using the equity in their portfolios to buy additional properties and improve their existing stock.
“Our research tells us that many landlords have existing buy-to-let mortgages on very favourable terms and would prefer not to remortgage if there was a competitive second charge option.”
It’s an option investors have been looking for for some time according Bradley Moore, director of second charge loans at Brightstar. Moore says he has always had plenty of enquiries but hasn’t had the options available to match.
“We now have a plethora of lenders that have second charge options for investment properties and the competition has meant rates have started to fall,” he adds.
Paul McGerrigan, chief executive, secured loan brokerage Loan.co.uk agrees.
“It used to be a very niche offering, but there are now six established lenders in the space. This development is very much driven from the recovery in the property market. People are investing in property again and demanding greater options and flexibility in leveraging equity from their buy-to-let portfolio.”
While Precise is the latest big name to make its move into the buy-to-let second charge market, a number of other lenders are already making their mark in it, namely Shawbrook, Prestige and Blemain.
“Shawbrook has led the way for buy-to-let second charge in recent times and continues to apply a flexible approach to its products,” says Moore. “Blemain has also been competitive and its product allows for personal income to pick up on any rental shortfall which is a huge benefit.
“Prestige has come to market with a 5.79% headline rate for professional landlords, this is a significant move and will definitely assist the growth of the market.”
The benefits of taking out a secured loan secured against a buy-to-let property in order to raise the deposit to invest in another are clear. The buy-to-let market is fast moving and dynamic. Investors must move quickly to secure a good deal and, despite its buoyancy the buy-to-let remortgage market can’t compete with second charges when it comes to speed.
“I think speed is a major factor,” says Moore. “Investors often need access to the funds quickly and a second charge is more often than not going to outpace a complete re-finance. If the client is also enjoying a low first charge rate then they are better off retaining it.”
Of course there has long been a solution to the often cumbersome process of remortgaging in order to raise funds. Bridging finance has been a firm friend to investors for many years and in recent times, thanks to the work of those within the sector in cleaning up its reputation, it has grown further in popularity.
With secured loans gaining prominence within the buy-to-let arena can they edge bridges from the top spot and come investors preferred source of alternative finance?
“The emergence of secured loans within the buy-to-let space has been driven by the need to offer customers greater choice when making investment decisions,” says McGerrigan. “The main concern for customers when bridging is that they can be hit with very hefty fees if they run over the set term. Whilst with a secured loan, customers can plan their finances better, ensuring they can afford the monthly payments over a set period of time and have less pressure on the timing of the exit.”
The best bridging rates currently on offer are around 0.6% per month and tend to be for first charges. Regulated second charges are even more expensive due to a lack of lenders with rates are from around 1.2% per month (14 to 15% per annum). For clean applications at similar LTVs secured loans are available at under 5% with no ERC’s so compare very favourably.
“With a bridge you’ve got to be out in 12-18 months max,” says Steve Walker, managing director, Promise Solutions.
“You may have your exit planned but things change. Borrowers often find they are not ready to exit their bridging loan and need to extend the facility further than lenders will accommodate. We know this because so many people apply for bridging loans to pay off another bridge. Many lenders won’t entertain this and borrowers usually end up paying higher rates and additional fees”.
“If borrowers can demonstrate affordability they can take out a capital repayment secured loan over a longer period to keep their repayments much lower than a comparable interest only bridge. With the most lenders they can exit with minimal ERCs or can make overpayments without penalty. Secured loans can really ticks the “good outcomes” box by being cheaper over a short term, more flexible and not rushing borrowers in to hasty refinancing. We’re seeing more of this but only because we actually talk to brokers about it.”
Indeed, the take up of second charge as a tool for buy-to-let investors depends largely on how much those investors know about the products on offer.
“It just comes back to awareness,” says Moore. “We (lenders and master brokers) are all working hard to spread the word around second charges and how they can prove a better option for clients on both residential and buy-to-let, unless you have been living in a cave it would be very hard to miss what is going on with regulation for second charge under the Mortgage Credit Directive so the word is definitely getting out to the mainstream market.”
For McGerrigan, the intermediary market is key.
“There is a big responsibility to educate financial intermediaries, providing them with the confidence to advise and recommend secured loans in the buy-to-let space,” he says. “This can be delivered in a number of ways, including more face-to-face engagement, training road shows, workshops and case studies. Having a commitment to education will support the growth of the secured loan market and offer customers greater choice when borrowing money. This education also includes compliance and responsible broking, ensuring all customers are fully informed when making their decisions on borrowing.”
Many lenders and brokers are actively working to deliver this education. Precise has been running roadshows led by head of sales Roger Morris which include advice for those advisers feeling some trepidation about the second charge market, ahead of next year’s MCD implementation.
“Roger’s Roadshows are becoming legendary and he covers this topic amongst many others,” says Cleary. “We believe that the role of the sales team has evolved into that of an educator and supporter of the broker market. Also, our marketing team is busy creating various tools designed to help the broker understand how our products can be used for the benefit of their clients.”