In the past few weeks, some lenders have left the sector altogether due to funding concerns or a diminishing risk appetite. Others have lowered loan-to-values or put purchase business on hold because they can no longer send out surveyors to do physical valuations. They may also be fearful over falling house prices, although none have yet admitted this as their reason for scaling back.
The number of products on the market has fallen dramatically and landlords are nervous about tenants falling behind with rent as evictions have been put on hold for at least the next three months. Advisers say their phones have been ringing off the hook as their clients try to understand the new landscape and find out what help is on offer, but they are braced for a sharp downturn in business as the lockdown persists.
Diversification plans
Many are looking for ways to diversify their activity while the purchase market is on ice, although they are optimistic that, when social distancing restrictions come to an end, there will be pent-up demand from those landlords who are in a strong financial position to profit from others who are selling out.
For the time being, advisers have been proving their worth by helping landlords to understand the new reality and explaining technicalities around mortgage payment holidays and other reforms. The speed and scale of change introduced by the government and lenders over the past month have left many borrowers confused and therefore vulnerable to making costly mistakes.
Clients often do not realise that taking a repayment break comes at a price. They must still make up the shortfall through higher monthly payments or by extending their term. Others have more worrying misconceptions about the payment break.
“We had a landlord who rang one of our brokers and said ‘I’ve cancelled all the direct debits for the mortgage payments on my buy-to-let portfolio,’” says John Charcol mortgage consultant David Rounsfell.
“He had seen on the news that the government was promising payment holidays for buy-to-let mortgages, so he went ahead and stopped all his direct debits to the lender. After a sharp intake of breath, the broker told him ‘You are going to have to reinstate them all or they will go down as missed payments and it will affect your credit rating.’ He did not understand that you have to request a payment holiday and you cannot just stop paying your mortgage.
“If he has made this mistake, I imagine there will be lots of other landlords who have done the same and potentially residential borrowers as well. He had around 15 properties, so he is going to be on the phone for hours putting it right.”
End of the Boris bounce
Before the Covid-19 crisis took hold, the property market had been enjoying the so-called Boris Bounce, with a surge in activity following the decisive general election result and an end to uncertainty over Brexit.
Xpress Mortgages director Rachel Lummis says her firm had a record month just before the pandemic hit the UK. In the week before surveyors were stopped from going out to do property inspections, Lummis had around 10 buy-to-let offers come through where the valuation was spot on. She says that would be impossible now and she expects business to get a lot tougher over the next three months.
“Back when the former Bank of England governor, Mark Carney, said a no-deal Brexit could result in a 30 per cent drop in house prices, we had a lot of down-valuations. In several cases values were cut by 30 per cent and the surveyors actually cited Carney’s comments in their reports. It was carnage then, but we have just had our busiest month for a year.”
Lummis anticipates significant contraction in the buy-to-let sector and thinks not everyone will survive.
“I think we are going to see a lot more lenders pull out and a few will disappear. It is not going to be the same. I do not know what proportion of their borrowers will request a payment holiday, but it would not take many to really affect them. They are not geared up for this because buy-to-let mortgages do not usually have payment holidays,” she says.
Clayhall Financial Services director David Conway says now is a good time for brokers to focus on bolstering other areas of their business that are often neglected.
“I will be going back to clients and reviewing their protection and general insurance needs, as well as making referrals for will-writing,” he says.
“We also have a lot of clients who are coming to the end of mortgage rates between now and September. Brokers have got to make the most of the time they have now to do the kind of business they normally struggle to fit in.”
But he believes there will be plenty of landlords readying themselves to snap up discounted properties as the crisis unfolds.
“As a landlord myself, and having spoken to some of my clients, I think the confident and experienced investors will take advantage of this opportunity. Some are predicting a 15 per cent drop in house prices and, while I do not believe that, there are definitely deals to be had.”
Given the restrictions on LTVs, the landlords best placed to take advantage of market conditions will be those with plenty of equity in portfolios or cash in the bank to invest.
Keep busy
Rounsfell agrees this is no time for brokers to sit on their hands.
“You have got to try and look at it from a glass-half-full perspective. I think the market will come back to normal at some point, albeit that normal will not be quite what it is now.”
Like others, Rounsfell believes some players will be driven out of the sector altogether, with non-bank lenders most at risk because they cannot access liquidity provided by the Bank of England.
But he says: “There are still lenders out there who are willing to lend. Because typically buy-to-lets are now more complicated, lenders are saying we should get the applications in now, while we have a bit of time on our hands. Then those clients will be first in the queue to pick up good properties when the market comes back. For landlords who have any expansion plans, why not take the time now to look at what they have got and see if there are any better rates or whether it is possible to get some cash out, so that they are better placed when it all settles down.”
Altura Mortgage Finance managing director Rob Gill says overseas buyers will be seeking investment opportunities in the UK. Many of his ex-pat client base are from China, Hong Kong and Singapore, so they are ahead in processing the impact of coronavirus, which perhaps gives them a more optimistic outlook.
He says: “There will be an opportunity for overseas buyers because property prices will probably be softer, but more importantly in the UK our currency will be weaker.
“They are at least two months ahead of us in Hong Kong, so they feel they understand coronavirus far more than we do. While life is still difficult over there, they are getting through it and coming out the other side. Mostly they feel confident that we will too.”
