It’s a funny time to be writing about the state of the market. Several months on from the Brexit referendum and despite our new prime minister’s assurances that ‘Brexit means Brexit’, no-one really knows what Brexit actually means. The uncertainty is palpable and while it’s far too early to see whether it’s having an impact on lender appetite or property values, it’s hanging in the air and is a factor no-one can ignore.
Add to this the slew of changes to the landscape for buy-to-let and you start to realise, any comment on the so-called state of the market is not going to be definitive. That said, I do have a few observations.
Next year landlords will see the tax relief they can claim on their mortgage interest payments start to taper from a maximum of 45 per cent down to 20 per cent by 2020. Many lenders have already raised their rental income ratios from 125 per cent up to 145 per cent to accommodate this. While there are still plenty of options for landlords at 125 per cent, I fully expect these to reduce over the coming six months – especially because the Bank of England’s Prudential Regulation Authority is due to publish its new rules for buy-to-let later this year. If these are along the lines that the PRA has suggested, affordability for landlords is going to get tighter still.
All of this has implications for bridging and short-term finance. More often than not, developers using a bridge to fund short-term refurbishment projects exit into a buy-to-let. Bridging lenders are already considering this when agreeing short-term finance as the availability and make-up of buy-to-let products on the market in six to nine months’ time will materially affect the likelihood of that exit.
I don’t believe these shifting dynamics automatically mean that bridging availability will reduce but I do expect there to be changes. Some lenders may look to rebalance the types of deals they approve as they adjust and understanding how their appetites fluctuate is going to be key for advisers who need to get deals done quickly.
A more mature market
I’m slightly reluctant to talk about negative rumours flying around for fear of talking the market down – I think sometimes we are our own worst enemies. That said, there are a number of potentially damaging rumours that I think should be addressed head on. It is no secret that a number of specialist lenders in the market are turning away more deals than they used to and there is talk that funding lines have been pulled by some of the larger banks.
Whether or not the rumours have foundation in fact, I think it’s important we remember just how far this market has come in the past decade. Yes, some specialist lenders are backed by bank funding lines. But there are also many specialists that have far more diversified funding sources. Both Shawbrook and Precise Mortgages have access to retail deposits to finance new lending – a source of finance that has really opened up specialist lending and made short-term finance much cheaper for developers.
Additionally, the market also has lenders backed by both private and institutional investors such as West One, LendInvest or LandBay to name just a few. We should not forget that there is a wide selection of options for clients looking for short-term finance and that the market has matured significantly in recent years. Lenders have learnt from mistakes made in the past and no longer rely on just one source of funding.
Providers’ appetite to lend may ebb and flow but for advisers the important thing is being able to find an appropriate solution for clients. Thankfully, the short-term market is now substantially diversified and broad enough to ensure that there are always options for well-packaged deals that make commercial sense for both the borrower and lender.