Lending to inexperienced borrowers
Gary Bailey (pictured) managing director of Hope Capital
One of the key things that most lenders look for in a borrower is experience; particularly in buy-to-let or that someone has carried out developments of a certain size.
But it’s a bit like going for your first job; how do you get the experience if nobody will enable you to get it in the first place?
Previously there was a lot about ‘accidental landlords’; people who, because they had inherited a house or moved in with a new partner suddenly found themselves with a home that they then rented out, but the change in tax rules means there are now fewer new landlords of this type.
The more stringent income tax implications are starting to bite and will become worse still in April 2020 when landlords can deduct less of their finance costs from their income.
As a result, more people may be inclined to sell any such property that they may end up with. It also means that there will be fewer people with experience of renting out properties.
If someone then proactively chooses to move into the buy-to-let sector, it may therefore be harder for them to get the finance to do so, this is where an experienced and well-established lender can help
One area many mortgage brokers are actively encouraging their clients to get involved, is in semi-commercial property because there are number of tax benefits when compared to a residential buy-to-let property.
However, it’s important borrowers seek advice from a professional tax adviser or accountant to fully understand the benefits and any potential implications.
Often moving into this area will require a property to be adapted or refurbished which is where a bridging loan will be required.
If a borrower has experience as a successful residential landlord already, it makes perfect sense for a lender to lend to them, even if they are new to this area, but there are lenders who don’t feel the same way.
Another area which maximises yields for landlords is adapting a property into a house of multiple occupancy.
It is the perfect use of bridging finance before the borrower switches to a buy-to-let loan, typically on a lower LTV than they would have achieved before the change of purpose.
There is always a first time to do this however and so it is important that the borrower can get the finance to enable them to.
A key element for brokers to be aware of when working with inexperienced borrowers, is to find a lender who is happy to provide the borrower with more support if they need it.
A key partnership is with a lender who will be able to provide guidance if required.
The borrower will also need a lender who will be understanding if a project then takes slightly longer than originally anticipated because of unforeseen challenges and the broker’s inexperience.
What neither broker or borrower wants is a lender who says they will lend and then clamps down hard if the borrower hits difficulties.
It is key that the broker finds a lender who is both willing to work with a first-time landlord or developer and that the borrower and lender work together.
The borrower will need to keep the lender informed on progress throughout any work done on the property.
Where lender and borrower work in co-operation like this it is more likely that the lender will extend the loan if necessary, to enable the borrower to complete their development should the loan over-run.