After closing our second substantial Buy-to-Let funding line worth £200 million with another global financial partner, National Australia Bank, we got to thinking: what is it about the UK Buy-to-Let lending market that is attracting institutional investors to invest in Buy-to-Let mortgages, and what are they looking for from the lenders?
We think it comes down to three things:
- An efficient origination platform built on lender expertise
- Diversification across a variety of borrower types
- Technological innovation.
Our sales director, Ian Boden, considered these three things and more:
Expertise and trust
Today’s investors are looking for efficient origination platforms that give them a gateway to a market they might not otherwise have access to. The ability to invest in Buy-to-Let mortgages without personally requiring the infrastructure is a powerful incentive.
Institutional property finance investors are rarely property market experts. Instead, they rely on the lending platform they invest through to exploit their own market expertise to help them make the right lending decisions. In Buy-to-Let, for example, the variety of property types a lender might lend against can be vast.
Institutional investors are comforted by a lender’s track record operating extensively across a broad spectrum of standard and non-conforming property types, HMOs and MUFB.
An appetite to lend across multiple property types requires the lender’s book to have an exceptionally strong credit profile, and the lender must be able to assess risk profile on a sliding scale, according to the variables attached to each and every loan it underwrites.
Investors want to see lenders apply interest coverage ratios that are higher than the standard product pay rate. Added to that, investors take comfort from seeing a loan book that is as well balanced as it is unbiased.
Diversification is as important for investors as it is lenders
Diversification is a well-worn word in the investment world and it is as important to investors as it is to a lender. Lenders that spread their risk across a variety of borrower types – individuals and corporate, for instance, or portfolio and no-portfolio landlords – are a natural destination for those seeking well risk-adjusted income from the property debt market.
And finally, technology. Technological innovation is weaving its way into the fabric of the mortgage market (at last), but it continues to be a differentiator that investors depend on when choosing lenders to invest in.
Investors want to see how deep and pervasive the application of technology is in the DNA of the lenders they work with. A lender’s ability to automate their workflow and improve the customer service their brokers receive is considered by investors to be a firm indicator of a lender’s potential to be the best-in-market for the long term.
Read more: What makes our Buy-to-Let mortgages different.
In our experience, investors want to understand what it is that frustrates brokers about finding and acquiring the right finance for their landlord customers and how lenders are fixing that. Whether it’s end-to-end online applications, faster know-your-customer checks, instant ID checks, or an openness to trial and implement Open Banking practices into the borrower journey; investors are becoming increasingly conversant in what technology innovations are being made, and selecting who to fund based on their findings.
Property finance investing by institutional investors is seeing a massive resurgence in popularity, as it takes an ever more prominent position at the core of many alternative investment portfolios.
And as the Buy-to-Let market grows, so do the choices investors need to make about which originators to back. It often seems like a tight game with fine margins, but the qualities expected of lenders by investors are becoming firmer and clearer.
A version of this piece that was originally published in Specialist Lending Solutions.