Why BTL-only lenders are moving into the residential space

Expert examines the ins and outs of the market

Why BTL-only lenders are moving into the residential space

A growing number of lenders who traditionally operated solely within the buy-to-let (BTL) market are now moving into the residential market. Market turmoil in Q4 has catalysed this trend.

Lisa Martin (pictured), development director of TMA Club, said other factors driving this transition include capital markets’ pricing and energy efficiency regulation for landlords.

So how are lenders pivoting into the residential space? And what will the BTL market look like in six months' time?

Why BTL lenders are entering the residential market

Martin said BTL lenders that are regulated and reliant on capital markets will often choose to diversify.

“Capital markets’ pricing prohibits their ability to draw BTL volumes at a level where affordability works for them,” Martin said.

She highlighted that residential funding lines are entirely separate to BTL and can provide a way for lenders to hedge their bets on a higher volume of customers.

“This was likely the long-term strategy of many lenders all along, though recent market turmoil will likely have brought this forward for some as the BTL market was initially thought to be cooling off in 2023,” Martin said.

Many lenders initially come to market with a BTL offering, enabling them to build a reputation with intermediaries, the wider market and the regulator before moving into the residential market. This can include clear, efficient communications with business development managers (BDMs) and processing teams, which is an integral part of dealing with complex cases.

The BTL market in the coming months

UK Finance forecasts a drop in gross new lending from £56 billion to £43 billion for the BTL market in 2023.

Martin noted that BTL lending is likely to contract as some smaller landlords decide to sell up, with properties subsequently picked up by professional landlords seeking to expand their portfolios.

“Indeed, we are seeing a move away from amateurs and towards more professional landlords, with a portion of private landlords setting up special purpose vehicles (SPVs) and putting properties into a Limited Company, improving their tax efficiency,” Martin said.

Martin added that landlords are also looking to diversify their portfolios, moving away from London and the South East to chase yield rather than capital growth. For many, she said this is taking the shape of small houses of multiple occupation (HMOs), which guarantee a higher yield gain.

Elsewhere, Martin said landlords are deferring extra borrowing in the hope that interest rates come down and they can opt to complete a product transfer rather than remortgage.

Despite this, Martin believes there is no question that the private rented sector (PRS) will survive and continue to thrive as it plays a vital part in supporting the UK housing market.

“As swap rates calm, we are edging closer to five-year fixed rates returning to 4.99% with ‘normal’ fees, this is a positive eventuality for broker pipelines,” she said.

Despite the rising base rate, Martin said stable swap rates will help stabilise fixed rate pricing further as well as improve affordability.

“As such, there are signs of positivity in the BTL space; the presence of lender innovation and the correct broker support will allow landlords to make the most of the many opportunities,” Martin said.

How brokers help landlords stay and thrive in the BTL space

Martin believes that brokers should be talking to their landlord clients about pending regulation changes.

“Proposed Energy Performance Certificate (EPC) regulations beginning in 2025, mean that any newly rented properties will need a rating of at least a ‘C’, and any existing tenancies will have until 2028 to make the change,” she said.

Martin said brokers can determine whether their clients need additional borrowing to expand their portfolio or carry out energy efficiency improvements. Indeed, she believes recommendations about the many options available to landlords are more critical than ever.

“Brokers have a responsibility to separate out portfolio debt for landlords, focusing on whether they can do further advances, remortgage with a capital raise or use product transfers for example,” Martin said.

“It is worth bearing in mind that many lenders in this space cannot offer further advances; therefore, placing a client on a five-year fixed rate, which may help meet the current ICR, could create potential issues further down the line.”

In the coming months, she believes brokers should focus on securing as much information as possible to help inform their clients.

Martin said this can be done by attending workshops and conferences run by trade bodies, publications and distributors.

“They should also work with lender BDMs, drawing upon their understanding of current and upcoming regulations,” she added.

Why do you believe more BTL lenders are moving into the residential market? Let us know in the comment section below.