By Mia Colgan
It is an understatement to say the last few months have been dominated by talk of economic uncertainty, which might continue on until the rest of the year.
In this time however I’ve been speaking to more and more brokers about the opportunities and how the right investors can keep finding these opportunities in the market.
At a recent coffee morning with some brokers, I chatted through what’s happening in the market at the moment:
- The current landscape for landlords and property investors
- What role bridging finance can play in helping them navigate this landscape
- Why future-proofing should be on everyone’s minds
The current landscape
What we’ve been seeing is a lot of consolidation in the Buy-to-Let market, as landlords swap portfolio expansion for refinancing their existing properties instead.
There are several reasons why they are doing this:
Firstly, rising house prices has made acquiring new properties more challenging, so they’ve instead chosen to invest in their current properties to improve the quality and increase potential rental yields.
The current economic climate has also increased demand for longer-term fixed mortgages.
A few interesting years for the country has made landlords more wary of a volatile economy, so 5-, 7- and 10-year mortgages are now increasingly important as they look to balance the books against long-term risk.
This is why, bringing the property up to a certain standard in order to be compliant with changing environmental regulations and to maximise yields throughout the lifetime of the loan, is even more important than ever.
The final area of future-proofing is driven by regulatory changes rather than an uncertain market.
While we can’t predict the peaks and troughs of the market, what we know for sure is that landlords need to ensure their home meets an EPC standard of C or above by 2025, for new properties, and 2028 for the rest of the rental sector.
Meeting this challenge is a necessity for all landlords, and the scale of that challenge will depend on the scale of their portfolio. From a few properties to vast portfolios, there will be a lot of different obstacles to achieving this.
The role of bridging finance
A recent report found almost 1 in 5 landlords were expecting to pay £10,000 to get their homes up to the required rating, while 45% would need between £5,000 and £10,000.
Bridging finance can serve a valuable function here, and for landlords who are expanding portfolios it’s important this topic is at the front of your and their mind.
Bridging finance at the acquisition phase:
Carrying out light refurbishment to a property when purchasing, i.e. new kitchens, bathrooms, windows etc. to make a property more ‘lettable’ can not only increase the potential rental, but these changes should also increase the EPC rating.
Bridging finance, be it on an auction product, standard bridge and so on, allows the clients to purchase the property and carry out these necessary works. This then later gives investors options to either retain the property as a Buy-to-Let or sell it to make a profit.
Bridge-to-Let finance works for refurbishments with the express intention of exiting on to a Buy-to-Let loan, whether they are looking to enhance the current BTL or they could be turning it into a HMO. This comes with a lot of transition incentives for the borrower.
Refurbishment finance also has a role to play at the acquisition stage for investors looking to remodel rundown buildings or change their use to make way for rental properties.
In some cases, heavier refurbishment finance is a good middle ground for clients, as generally more expensive and more complex development finance may not be right for the client.
All of these options work for property investors looking to pivot into the Buy-to-Let market, as well as for those who are already there.
The long-term, steady yields the Buy-to-Let market offers is more attractive to investors in a challenging landscape.
So house flippers, developers and planning-gain investors can look to future-proof their interests by using these same products but then retaining the property as a rental.
What about for landlords with existing portfolios on Buy-to-Let mortgages, looking to future-proof their properties? The incentives are there for a lot of lenders to get it done, but at a time of financial challenge; paying out of pocket is, understandably, an unattractive prospect.
With approximately a third of the private rental sector being over 80 years old, the scale of the improvement works might be a lot larger and when distributed over a portfolio, can become challengingly expensive.
What bridging finance affords your clients here, is the flexibility to take a short-term loan and distribute it across the portfolio.
So by capital raising against one of your properties, you can invest that money into your others to bring them up to the required standard before remortgaging that bridge into a Buy-to-Let.
Creative solutions to a challenging environment is what the right bridging loan can give landlords.
Why we need to be future-proofing now
When we consider future-proofing it sounds like a relatively simple thing, but I think from the examples I’ve run through we can agree it is a different experience depending on where your clients are:
- Are they consolidating their existing portfolio?
- Are they making improvements to keep up with regulatory changes?
- Are they changing focus towards a renting strategy?
- Are they starting from scratch with a new property that needs a larger-scale refurb?
All of these approaches are live issues for investors and ones we need to be equipped to deal with, and deal with it now.
The looming deadline for meeting EPC requirements is looming for all landlords, and its better to be thinking actively about that now before waiting too long and then putting pressure on contractors and trying to source build materials and so on.
Importantly as well, improving EPC now gives landlords an opportunity to pass on a direct benefit to themselves and renters in a climate where energy bills are increasing.
A more efficient home can help relieve that pressure, which is another incentive to be actively looking to future-proof.