30 June 2023

An alternative take on ‘alternative’ Buy-to-Let Lending

By Steve Cox, Chief Commercial Officer at Fleet Mortgages

Traditionalists looking at ‘alternative approaches to lending’ might well conclude that the notion of lending money hasn’t really changed for centuries, and neither should it.

There is, I must admit, something to be said for an approach which focuses on cost of funds, charging rates above those cost of funds, securing margin, ensuring ongoing profitability, only lending to those that can afford it, treating the customer fairly, and everything else that shapes this ‘traditional’ approach.

That said, within the buy-to-let market as much as the residential space, there are clearly different borrower needs and circumstances, different property types, different tenancy targets, different tenancies, different borrowing vehicles, etc, which require an approach which we might not call ‘alternative’ but is definitely different to what was once the only available options in this space.

So, where once we had a very sharp differential between lending to individual landlord borrowers and limited companies, for example, now we don’t. Where once we had ASTLs and nothing else, now we have short-term and holiday lets as well. Where once we had opportunities for landlords to borrow very high LTVs, now the deposit/equity commitment has to be that much higher.

It all shapes into a different way of lending in the buy-to-let space; one that moves and shifts with the needs of today’s landlord borrowers, in an environment which requires them to be far more professionally engaged with the sector, and where there are all manner of other considerations, not least the very ongoing profitability of their individual purchases and wider portfolios.

Indeed, this is a sector much more portfolio landlord-based than it ever was, and as a specialist in this space, we as lenders – and you as advisers – have to be much more in tune with the needs of the entire portfolio, not just the one individual property you may be seeking finance for at any specific time.

This is because the big issues and concerns of any landlord, with anything resembling a portfolio, will not be confined to just one property.

Take the biggest issue facing landlords at present, specifically those seeking finance, which is affordability, and being able to get over that particular obstacle in an environment where rates have increased fairly dramatically, where we have a market with increased and sometimes intense volatility, and rents – while having risen – may not be enough to meet traditional stress rates.

The lending space has needed to shift somewhat and to provide product solutions to those landlords – and their advisers – who may be having difficulty in meeting ‘traditional’ affordability measures. Hence, we have had growth in the number of five-year fixes which apply a trade-off with lower rates compensated by a higher upfront fee structure.

Then, there is the opportunity to reward those landlords who have properties already meeting what we anticipate will be the minimum EPC standards for rental properties by 2028 – C and above. Lenders have been able to offer slightly cheaper rates on these properties, in order to be able to get those properties onto their books and to show the mortgage finance benefit of owning these, as well as the energy-efficiencies that can be passed onto the tenant.

Fleet certainly offer these, but we have for a while recognised this should be just one part of the ‘Green’ focus, and we’ve also recently introduced a new product feature on our non-Green longer-term fixes offering £1,000 cashback to any landlord who improves the EPC of the mortgaged property to C or above during the initial fixed-rate term.

Again, it’s an incentive to get the improvements done, and to receive some money against the cost of doing that. We’re acutely aware that we still have a situation where the majority of private rental sector properties are below EPC level C, and this hopefully helps move the landlord to a point where not only can they get this work done and receive the cashback, but they will then qualify – when they next remortgage - for those ‘Green’ products talked about above which come with slightly cheaper rates. A win-win I would think.

Finally, the broader point here is about keeping landlords invested in a marketplace where the supply of PRS properties needs to be maintained, and where some landlords might be considering their options, particularly if they are having difficulty with affordability.

As lenders – and advisers – we have to look at the ways and means by which we can ensure ongoing, affordable financing, because let’s be frank, the demand for private tenancies is not going down. Whether these are truly ‘alternative’ lending strategies, I suspect not, but they are certainly designed to look at needs and circumstances in today’s changed (and ever-changing) market and to give all stakeholders the certainty they always crave.


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