A Q&A with landlords about the buy-to-let market – 13 May 2020
Karl Griggs, Director at CPC Finance, recently participated in a webinar with Property Investor News. After his presentation, a number of valuable questions were asked by the audience, which other investors may also find themselves pondering. Here we are sharing his insightful answers.
What changes do you think we will see in how lenders operate post-lockdown?
I anticipate that we will probably continue to see fewer products than before on the market and longer processing times for underwriting. I think that manual underwriting will become more important as lenders really try to get to know their investor customers. This has the advantage of greater flexibility from lenders as it is a more pragmatic approach, but it will also lengthen the underwriting processing times. In any case, we are going to see more paperwork for investors to manage. This is something that CPC Finance helps our clients with. We consolidate and keep updated all the information on our clients’ portfolios. That way, when you purchase or re-mortgage a property, it is ready for the lender to review.
How quickly do you think Loan to Values (LTVs) will go back to normal?
The real problem with LTVs is the lack of comparable property prices to enable lenders to accurately judge a property’s value. Since the property market (and therefore valuations) has basically had a two month pause, it will be difficult for lenders to judge what a suitable value is for properties. Will lenders accept pre-COVID comparisons when looking at property values? It will be an uncertain period for a time, as lenders work out the best way forward. I do not think that LTVs will return to normal for a while, as lenders will probably opt to stay on the safe side by offering lower LTVs than usual.
We are also hearing that as a consequence of the uncertainty of the pandemic, professional indemnity insurance costs are going up for valuers and there will therefore be fewer active valuers. This means that there will be even fewer valuers doing the same work and so valuations will take even longer than before, and at an increased cost.
What is your view of the market post-furloughs?
The market we are now moving into is an unknown market. We do not yet know how lenders will respond in their underwriting to income from people who have been furloughed during COVID-19, or the self-employed. Furloughed employees will have lower income than usual on their payslips – will lenders want to judge income based on furloughed levels, or normal levels? We do not yet know what numbers lenders are going to accept.
One likely outcome is that the residential borrowing market is going to take a hit as aspiring homeowners are going to be able to borrow less – their lower income during the pandemic means that the income multiple they are allowed will result in a lower total borrowing amount. This may even mean that many are not able to secure the mortgage they want. As a consequence, there will probably be both more people renting, and more properties available for investors to purchase.
Are payment holidays a red flag to lenders?
We are not yet completely clear on how lenders will react to a mortgage payment holiday, even if it will not appear on your credit file. We do know that they will be looking at why you needed to apply for a mortgage payment holiday and if it was the result of a poor business plan that did not adequately take into account void periods. Lenders are going to be looking very carefully at business plans.
They will definitely look negatively on any investor who has misused the service. And they are very likely to be checking bank statements from the pandemic period (probably March-May 2020) to check your activity. For example, if you took a mortgage payment holiday, but you were still receiving rent, this will show up and that will definitely be a red flag to lenders.
If you would like more detail about how lenders might react to a mortgage payment holiday, read our blog.
With an HMO property, will void periods due to the pandemic be looked at negatively by lenders for future lending?
Actually, if you have had void periods and were able to carry on operating as usual, without a mortgage payment holiday, this will be looked on as a sign of a strong business model. It means that you have built your business model in a responsible way, taking into account inevitable void periods. The new stress rates were intended to cover void periods and continuing activity despite voids is a positive signal to a lender.
Will lenders take a view of bounce back loans on balances?
Lenders have not yet had time to go out with their reactions. Over the next 6-12 weeks, there will be changes to underwriting requirements and we will have more clarity on this issue. I anticipate that lenders will be looking closely at all pandemic-related financing, such as mortgage payment holidays and bounce back loans.
Do you think that the pandemic will change how lenders view landlords with more than 15 properties?
I believe that lenders might start to look more positively on landlords with larger portfolios, as large portfolios mean that your risk is spread widely across your business. If the pandemic flares up again, then you are more likely to be able to manage a couple of impacted tenants, than landlords with only a few properties, who would be severely affected if their tenants became ill or lost their jobs.
Do you have any advice for people looking to refinance part of a portfolio?
To be honest, it doesn’t matter if you want to refinance your whole portfolio, or just a part of it. Whichever is the case, you will need to present the whole portfolio to your lender, even if you just want to refinance one property. So you will want to ensure that the business model and paperwork for your entire portfolio is solid.