Does my Buy to Let lending criteria make sense?

Does my Buy to Let lending criteria make sense?

16:28 PM, 23rd August 2013, About 11 years ago 9

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While fully acknowledging that I am not a financial specialist I do know the residential property market. I have a proven track record of making money from letting property for 40 years. In my first book, which I released just a few months ago, I venture to give my opinion of the criteria I would apply if I were lending my money to a person who wanted to buy property to let. Does my Buy to Let lending criteria make sense

  • Does this person know the law and regulation related to the business, has he taken the trouble to become accredited through an education based scheme.
  • Has this person got sufficient funds, borrowed or otherwise, to bring the property up to the Decent Homes Standard, or higher if the market demands, and to meet all the legal requirements before the property is let
  • Has this person done the homework, is there a market for the property he is proposing to let in the area where he is proposing to buy.
  • Is there any regulation in place that the landlord is not aware of, Article 4 Directions, Selective Licensing, planning controls, lease restrictions etc
  • Will the property return a positive cash flow that will pay the loan, keep the property up to standard, pay Agency fees (if the property is going to be managed by an Agent), Pay on-going letting fees/marketing costs and leave a margin for rent arrears and the cost of removing a tenant if necessary
  • Does this person know how to legally remove an undesirable tenant and the length of time this might take and has he got the financial safety net to cover the loss of income during this period
  • Is this person a member of an organisation that will supply the correct documents and support to sustain the tenancy
  • Has this person got a system in place to ensure that he remains legally complaint at all times thus avoiding expensive litigation which may result in large fines, rent repayment orders for up to one years’ rent or up to 4 times the tenants deposit etc.
  • Has the person got Rent Guarantee Insurance, Public Liability Insurance, Landlord Property Insurance and (if the property is furnished) contents insurance
  • Does this person intend to manage the property himself or does he intend to employ a Letting Agent. If he does intend to employ a Letting Agent how will he choose a good Agent, who has Client Money Protection, and is he aware that he cannot devolve his legal responsibilities to that Agent
  • Has this person made provision to re-pay an interest only loan should the property value decrease

Are Banks aware of these important issues or are they making a risk assessment purely on FCA guidance and criteria without taking in to consideration the “real” risks of  investing in property to let?

Do you agree with me or am I missing the point?

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Mark Alexander - Founder of Property118

16:39 PM, 23rd August 2013, About 11 years ago

Hi Mary

In answer to your question, YES, your criteria does make sense so far as common sense goes. If it was applied by mortgage lenders I'm sure their arrears and default rates would improve.

However, mortgage lenders can also justify not introducing your critera.

This is because their arrears and default rates are historically very low based primarily on their valuation and credit scoring models. Their justification for not introducing your criteria would be cost, i.e. it would cost them more to implement your criteria than it would save them. Just imagine the extra staff they would need to employ and train to implement this criteria. Compare that against the money they would save by way of reduced arrears and defaults and it simply wouldn't stack up. Therefore, they take a commercial decision on balance of probability.

The other problem, even for a niche lender, is that they would get a lot less business if they were to introduce this criteria. That's because we all be conditioned by the digital revolution and we expect instant decisions. Nevertheless, we still moan when "computer says no".

I can give you a very similar analogy based on some figures I've looked at as to whether RGI is viable for me. I don't buy RGI as I've worked out that, for me at least, based on economies of scale, the insurance premiums would have cost me more than the payouts would have been.

The reason I think this particular chapter of your book is so useful is that it teaches landlords the right questions to be asking themselves. Lenders might not care too much whether a landlord ends up as a default statistic but it will matter to the landlords very much as it could ruin their lives.

I'm loving your book by the way! 🙂

Neil Patterson

16:43 PM, 23rd August 2013, About 11 years ago

Hi Mary,

Agree with you on a common sense basis and I would vote for you owning a bank lol.

However the cold hard facts are that Banks now only exist to make money and as a mature market (or it used to be) with very low short term profit margins the cost of using your criteria in terms of admin and staff would not make it worth lending at the rates you would need to be competitive.

That is why you have simple criteria with no account taken of the individual other than computerised credit scoring and simple stress testing

Your Bank would therefore have a fantastic risk profile but make no profit.

When I was at The Chelsea pre-credit crunch 2003 I sat with the people that costed new products and they worked on a profit margin of 0.85% over 5 years as an average. Although BTL and margins post credit crunch will be a lot higher I expect but we are still talking a small figure.

Therefore Banks have to sell a lot of loans with economies of scale and low costs to survive.

Neil Patterson

16:47 PM, 23rd August 2013, About 11 years ago

Ah what happened to the good old days when for my first mortgage I had to have an interview with my Branch manager (I was Barclays staff) and got quizzed on being able to afford 42.5K.

Then asked if I was doing the right thing as I was only engaged you know not married yet!

Mary Latham

17:14 PM, 23rd August 2013, About 11 years ago

Reply to the comment left by "Neil Patterson" at "23/08/2013 - 16:47":

When I first decided that I wanted to become a full time landlord and stay at home to bring up my children I too had to be interviewed by my Bank Manager - they could make decisions in those days and their relationship with customers was key. I literally has to sell him the idea that what I wanted to do was going to work. At the end of the day it was only because I convinced Lloyds Bank that I was a good risk that they loaned me the money, When I tell you that it took my getting a senior manager being invited to retire early you can see that this was not an easy task. I also would not let them put a charge on my family home - himself did not support what I was doing and was terrified that we would end up in paupers jail.

Looking back they took a big risk and I am certain that these days I would be turned down and as we know that would not have been a good decision on their part. I have no doubt that is was my salesmanship that got me that money and my determination to prove that I was right that made me succeed.

Times have changed and I do see the point that you are both making but the fact is that many people should not be allowed to borrow money to invest in property to let, it is irresponsible lending because they really have no idea what is involved and when interests rates rise I can see big problems - never mind those who have relied on the increase in their properties to repay interest only loans which I also talk about in the book. I expect if Banks can balance their books they don't really care that some individuals are ruined along the way.

Follow me on Twitter@landlordtweets

My book, where I warn about the storm clouds that are gathering for landlords is here >>>

Neil Patterson

17:21 PM, 23rd August 2013, About 11 years ago

Hi Mary,

I 100% agree with you and your article.

It is just sad that in these days of big business the only model that seems to economically work is "Computer Says No" ! oh and I forgot the cough on the end.

The alternative is to pay higher interest rates and given the option no one would do that.

Mark Alexander - Founder of Property118

17:33 PM, 23rd August 2013, About 11 years ago

Reply to the comment left by "Mary Latham" at "23/08/2013 - 17:14":

As you may know Mary, the only Buy to Let mortgage lender not to need a bail out after the credit crunch has their main underwriting offices in your town. I am of course talking about Paragon Mortgages. Their default rates are minuscule compared to other lenders in the sector and as a result their shares values have rocketed since the credit crunch. Interesting to note then that their lending criteria now is not very much different to what it was pre-credit crunch. One of the main reasons brokers used them was that they offered Forward Buying Facilities - a concept created by yours truly by the way 🙂 This was an agreement to lend up to a certain figure subject only to further property based due diligence. They were also one of the first buy to let lenders to lend money to limited companies and on HMO's. Brokers used to moan like (well you know what) about their lending criteria. Paragon insisted on interviewing every landlord who borrowed over a certain threshold and especially if they wanted a Forward Buying Facility. They asked for lots more information and they were not cheap - but I suppose that's based on whether you are comparing apples with apples. Mortgage Express were the yard stick most brokers compared other lenders to but look what happened to them! MX didn't lend to Limited companies or against the security of HMO's until their final hours, hence Paragon mopped up all that lovely profitable business. In hindsight I think we can safely say that Paragon Mortgages got it right. Must be something about people from the West Midlands 😉

Neil Patterson

17:40 PM, 23rd August 2013, About 11 years ago

Reply to the comment left by "Mark Alexander" at "23/08/2013 - 17:33":

Paragon also saw the writing on the wall and pulled out of doing new business long before anyone else in the credit crunch.

It was the failure of the inter bank lending market that caused the collapse and the subsequent cost of borrowing money rather than the intrinsic BTL business model as profit margins and default rates were better than main res loans.

Peter Simpson

15:53 PM, 26th August 2013, About 11 years ago

Reply to the comment left by "Mark Alexander" at "23/08/2013 - 17:33":

Paragon were born out of the ashes of the debacle of what was National Home Loans were they not? Don't think the old NHL got much right

Mark Alexander - Founder of Property118

15:12 PM, 27th August 2013, About 11 years ago

Reply to the comment left by "Peter Simpson" at "26/08/2013 - 15:53":

That was at the end of the late 80's and early 90's recession wasn't it?

As the saying goes, "what doesn't kill you makes you wiser"

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