The buy-to-let market has gone from strength to strength since it began 17 years ago. It has provided rental accommodation for millions of people, and become an alternative to share-based pensions for those in retirement.
As an independent adviser who monitors the buy-to-let market I have seen only incremental changes since the credit crunch from high street lenders. This has prevented ambitious property investors from expanding their portfolios, with high street lenders either limiting the number of properties they are allowed to own, or the value of their investments. Coupled with outdated underwriting techniques, the inflexibility of high street lenders has created opportunities on which some other banks are able to capitalise.
Where the high street lenders are lacking flexibility, there are now ‘challenger banks’. They are tackling the rigid and inflexible lending criteria of the high street lenders.
These new challenger banks provide an underwriting and approval process where decisions are made by lending managers who talk directly to advisors/brokers. They are prepared to discuss a case and make a decision based on the risk of the application and not some inflexible criteria that means the customer’s application could be outside the lenders’ criteria or, even worse, a computer-based credit score system. These systems can reject a strong application with no right of override or appeal. Computer says NO!!
Shawbrook Bank is an example of a new challenger bank that is bringing a fresh approach to lending. Having launched in 2011, they offer a more flexible approach to the high street lenders. They will allow a borrower to grow from being a landlord of a single property, to a professional investor with a large portfolio. The traditional limits on portfolio sizes and values have gone, and they’re not just there for the straightforward cases. They will also consider short-term refurbishment loans and auction finance as well as financing multi-unit blocks of flats and houses of multiple occupation. All of which can be held in a number of legal entities including your personal name, companies, LLPs and trusts.
Shawbrook’s approach to underwriting is also very different. Shawbrook will listen to the explanation behind any adverse credit information and make a decision (although serious adverse credit is not acceptable). They undertake a credit search but do not credit score. The important difference is that a human makes the decision and not a computer.
HMOs (houses of multiple occupation) are another area where challenger banks are making a more accessible route for investment. They offer loans of up to 75% LTV on HMOs and will consider almost all types of HMO properties. HMOs have traditionally been difficult areas to borrow because they involve obtaining licences and strict fire regulations must be adhered to. These factors can often delay and complicate applications. That said, HMOs offer higher yields which are attractive for property investors.
And these new banks will also consider properties in need of refurbishment or structural alterations before converting to an HMO as well as student lets, another area of the market which is currently doing very well.
So it’s little wonder that customers and advisors are considering the likes of Shawbrook as an alternative to the high street lenders.
A challenger bank in action
Trevor of County Durham is an experienced property investor. He completed the development of a property which was let out to tenants producing a good rental income. Trevor had no mortgage on this property and needed to raise funds to allow him to develop two additional properties for which he had planning permission.
He approached us because he had been rejected by a High Street bank, despite having a perfect credit history and good income. We investigated the case and found that despite Trevor having two existing mortgages with a High Street lender, they were not showing on his credit file and as such he had a low credit score. The lender’s computer would not accept the application. After several weeks of speaking with the lender and the credit reference agency to get the mortgages showing on his credit report and thereby improving his credit score, the bureaucracy was taking us round in circles.
I approached Shawbrook Bank and was able to provide them with the mortgage statements and bank statements proving the existence of the two mortgages as well as a perfect payment history. Shawbrook approved the loan efficiently and advanced the funds to allow Trevor to build the two properties.
In the tradition of the World Cup the result was:
Shawbrook 1 High lender lender/computer say NO 0
*David Tonks is the Director of Advocate Finance Ltd, a Commercial Finance Brokerage
** You should always seek professional advice from a financial adviser / mortgage broker before proceeding with any loan or mortgage application