Lessons from the buy-to-let market

Article originally published in Mortgage Introducer March 2022 – page 22

There has been little argument that data plays an important part in lenders’ determination of value but that decision becomes harder when you begin to assess portfolio of loans and try to understand what is going on within it. It’s made more difficult if you do not have access to the infrastructure that supports the collection, collation, assessing and decision-making in the first place.

The Buy-to-Let (BTL) market offers a good example of how data and systems interoperability can change your ability to understand a market and do business. The Buy-to-Let property market boomed last year. According to UK Finance, purchase activity increased to £18bn in 2021 — up by a colossal 83% on activity in 2020. Now while you might assume the current bout of rising inflation and interest rates might deter property investors, there are a lot of reasons why this is not likely to be the case. As inflation takes hold, many landlords are seeing it result in higher wages, which in turn impacts rents bringing higher yields back to the sector. This will encourage more investment activity not only from established landlords but also from new players – such as investment banks who will see the benefit of funding the market if yields improve while declining in other asset classes.

But it is not one way traffic – which is why BTL promises to be a fascinating market that will continue to command due care and attention from those financing it. One of the biggest challenges facing landlords is the requirement to comply with the legislation regarding Energy Performace Certificates (EPC) scores in line with the Government’s intended target of raising the certification rating to a ‘C’ by 2025.

Some estimates put the estimated number of rental properties that would currently fail to achieve the required grade at over three million. When you consider the cost of retrofitting improvements to these properties, it’s easy to see why this is not a small issue and why lenders might suddenly feel exposed on any loans they have. Regulation is set to favour the future building of high-EPC properties and lenders should arguably be ready for lower-EPC properties to continue to fall in both the residential and buy-to-let markets.

There is plenty of evidence to suggest more than a cursory check might be appropriate. One 2020 study concluded that UK homes were losing heat up to three times faster than European properties, partly due to the fact that 38% of the UK’s housing stock was built before 1946. The Royal Institute of British Architects (RIBA) too raised the issue of England’s millions of homes built in the interwar period. They called for policies to incentivise private owners, who reportedly own more than 70% of these properties, to fund the installation of insulation, double or triple-glazing and replace old gas boilers, which the professional body estimated could cost £38 billion.

Understanding the lending risk is therefore critical, but we know from experience this kind of information does not exist within legacy systems. Our Buy To Let Hub is a web based desktop platform that helps lenders comply with the Prudential Regulatory Authority’s SS13/16 portfolio landlord underwriting standards. It is designed to deliver the very collation and assessment of complex and multiple data that speeds up the underwriting process and significantly reduces the administrative burden on brokers when submitting buy to let portfolios to lenders.

Lenders can configure their own rules around Interest Coverage Ratios (ICRs) and Loan To Value (LTV) exposures in real-time to reflect their own risk appetite and actual exposure levels. The software also provides brokers with the ability to easily import landlord data from multiple sources, which is automatically verified and converted into lender specific templates, before an application is submitted.

Perhaps one of the most valuable points this service makes is that increasingly, diverse sources of information need to be assessed outside the current legacy framework. Multiple properties, with multiple data points require technology that allows lenders to interoperate with these sources and decision-making tools if they choose. Being able to see current EPC ratings against each property in a portfolio is one such data point among many.

The BTL market promises to be a buoyant one with a lot of activity and interest. But it highlights an interesting point about how issues of Government policy are changing the nature of lending risk and that internal legacy systems will not swiftly and affordably make the leap to be part of the new world. Of course, you can always call upon us.