During the so-called ‘golden years’ in the early noughties, new lenders seemed to spring up almost every week, armed with US funding lines, seemingly endless marketing budgets and a voracious  appetite to lend. 

The growth of the specialist market during this period was spectacular. In 2002, specialist lenders accounted for around £22bn of lending and had a market share of around 10%, according to Bank of England data. Within five years they had trebled their lending, accounting for nearly a fifth of all new business written, by value. 

As we all know, though, the boom times didn’t last very long. After the financial crisis hit and Lehman Brothers imploded, the wholesale markets went into paralysis, taking away the very lifeforce powering the non-bank lending community here in the UK. 

Without money to lend, many non-bank lenders went out of business and, almost overnight, the UK’s specialist lending market all but disappeared. But not forever. 

After years of steady recovery, the specialist lending market is once again booming. Yes, rising interest rates are squeezing margins, making life difficult for a lot of non-banks, but all the ingredients are there for a new golden era of specialist lending. 

You might think, “Well, Phil, you would say that, wouldn’t you?” But the numbers stack up. 

Bank of England data shows that specialist lenders have increased lending volumes by 328% between 2009 and 2021, from under £5bn to more than £21bn. Perhaps even more impressive, they increased lending by 32%, or £5bn, between 2020 and 2021 alone. 

With talk of a slowing market, you might be tempted to assume that the specialist lending sector may again be about to peak.  

But, for me, this is a growth trend that looks set to continue – and for three good reasons. 

Buy-to-let complexity 

Firstly, let’s take a look at buy-to-let, the sector that we at Keystone Property Finance operate in. 

Since 2020, landlords buying in their own name have no longer been able to claim mortgage interest as an expense. Bizarrely, it means they have, in effect, had to pay tax on their turnover, rather than their profit, which hits higher earners particularly hard. 

However, those who buy through a limited company structure can still deduct expenses, meaning they have become an increasingly utilised vehicle for buying investment properties. 

In fact, a total of 47,400 new buy-to-let companies were incorporated in 2021, bringing the total number to nearly 270,000, according to Hampton’s analysis of Companies House data. 

This shift plays into the hands of specialist lenders enormously. While some lenders do accept limited company buy-to-lets, this is really a strength of the specialists, who understand how to underwrite these cases better than anyone.  

And if this trend continues to play out – and I think it will – I expect to see specialist lenders taking an ever-increasing share of this area of the market. 

The cost-of-living crisis 

Traditionally, specialist lenders have tended to operate further up the risk spectrum where there tends to be more generous margins on offer.  

For first-charge lenders, that might mean serving those with chequered credit histories, those with small deposits or those wanting to borrow at high loan-to-income ratios. 

While the Mortgage Market Review put the brakes on the riskiest types of lending, specialists still dominate this part of the market. And with the economic backdrop the way it is, it is an area primed for growth.  

Covid, soaring inflation and rising interest rates are all putting tremendous strain on household finances, meaning more and more borrowers are likely to fall foul of High Street lending criteria. 

Therefore, it is fortuitous that we once again have strong and growing competition among specialist lenders to ensure these borrowers are catered for. 

The rise of the broker 

One of the most impressive shifts over the past decade has been the re-emergence of the broker. 

Ten years ago, brokers accounted for roughly half of all residential mortgages written in the UK. Today that figure stands at around eight in 10, according to UK Finance data. That figure will be even higher in the buy-to-let space. 

That is great news for specialist lenders, as good brokers who understand the complexities of the buy to let sector realise that rate is simply one part of the puzzle as manual underwriting,  accommodative criteria and a strong and consistent service offering are equally as important. Those are things you can only really get from the specialist lending community 

Put all of these factors together and the future of the specialist lending community looks very rosy indeed. 

Phil Riches is Sales and Marketing Director at specialist buy-to-let lender Keystone Property Finance