First Published 03/23
"Financial Friends with Benefits."
It was the advent of the 1988 Housing Act which gave rise to the modern tenancy agreement. In simple terms it gave tenants the right to live undisturbed in a property for a defined period of time at an agreed rental. It also gave more power to landlords, allowing them to set the rental amount and giving them the ability to evict. It was a watershed moment for the UK rental market and indicative of the Thatcher government’s drive towards greater free-market autonomy in the housing sector.
Ultimately, it also gave rise, in the 1990’s, to the modern day ‘Buy-to-let’ mortgage. It’s hard to believe now that such a major component of modern-day specialist lending, one where outstanding Buy-to-let mortgage balances now surpass over £200 billion, only came into existence just over 25 years ago. When it did so it joined another tiny specialist product called ‘bridging.’ Bridging loans had come into existence in the 1960’s but had made little impact in their first 30 years.
Little did we know in the mid 1990s how the relationship between these potential partner products would eventually grow and blossom, to the point where a large proportion of bridging purchase, refurbishment, conversion, and development loans today rely upon Buy-to-let mortgages for an exit. These two forms of specialist finance, having become deeply entwined and reliant upon each other, have helped to shape the Buy-to-let market, opening up this form of investment to a massive number of new, professional landlords.
Whether from auction or private sale, bridging loans allow investors and landlords to seize opportunities. Properties ripe for renovation, modernisation, or conversion; properties that are even in some cases uninhabitable and un-mortgageable can be acquired and works funded to the point where they are habitable and indeed lettable.
Once let, and often with a short track record of rental receipts, these properties can then be refinanced onto a long term Buy-to-let mortgage.
Underlining just how inter-connected bridging and Buy-to-let lenders have become, in many cases Buy-to-let mortgage offers are obtained prior to bridging loans being completed. Twelve month bridging loans are obviously not subject to the same stress testing as a 25-year term mortgage, but with certainty of exit key for bridge lenders, the provision of a mortgage offer to demonstrate a potential exit is a vital underwriting consideration.
It's clear that the symbiotic relationship between Buy-to-let and bridging has allowed both to grow massively in recent years giving investors, landlords and borrowers a wide and highly competitive choice of options. Of course, the last 15 months have presented some pretty sizeable macroeconomic challenges, not least of all ten increases in bank base rate! There are clearly further challenges ahead, but equally there are factors that could help to underpin demand. With challenges come opportunities…
Bank base rate rises impact both standard and Buy-to-let mortgages but paradoxically, as first-time buyers struggle with affordability, the rental market receives a boost. Rising demand for rental property and falling supply has helped to offset negative impacts from restrictions in tax relief, removal of the 10% wear and tear allowance, the introduction of 3% stamp duty and most recently the reduction in capital gains tax allowance. Whilst these tax measures are prompting some smaller landlords to exit the market, those with bigger and more mature portfolios are generally taking a longer-term view.
As prices fall and the market softens, many professional landlords and investors are seeking to grow their portfolios in pursuit of long-term gain. They do so in the knowledge that rising demand for rental property brings increased rents.
At Saxon Trust we have seen a strong growth in auction purchase, commercial to residential conversions and residential to HMO bridge loans deals completing in recent months. Interestingly, we are not quoting for an increased number of auction purchases but our investors, having previously been outbid on many properties, now seem to be enjoying greater success at auction – another sign of a softening market.
With rates fixed for the duration of our loans, savvy investors have been securing quality property, bringing it up to the standard they expect from their portfolio and giving themselves the opportunity to wait for Buy-to-let rates to stabilise after recent upheavals. In time they will secure regular Buy-to-let deals to exit our facilities and so, the mutually beneficial relationship between us and Buy-to-let lenders, will continue to flourish. Financial friends with benefits!