30 June 2023

Alternative Approaches to Lending with Danny Belton

By Liza Campion, Head of Corporate Accounts at OSB Group

As Head of Lender Relationships at Legal & General Mortgage Club, Danny Belton is one of the most recognised and respected voices in the industry.

Liza Campion, Head of Corporate Accounts at OSB Group (which includes the Precise Mortgages, Kent Reliance for Intermediaries (KRFI) and InterBay lending brands) caught up with him over a coffee to discuss some of the challenges facing landlords, the increasing professionalisation of the buy to let sector and the need for greater clarification on energy efficiency targets.

Liza Campion (LC): Thanks so much Danny for taking time out of your busy schedule for a chat. It’s always great to catch up and find out what your thoughts are, especially during such a tumultuous time for the industry.

With that in mind, I thought I’d kick off by asking if you’ve seen a change in the type of customer coming through Legal & General Mortgage Club since Covid. For example, are you seeing more demand for specialist lending?

Danny Belton (DB): That’s a great question, Liza. Covid was a very difficult time for everyone, and a lot of people had to make tough decisions about their lives, such as questioning whether they wanted to carry on living in the house they were in, while many others lost their jobs or found they weren’t earning in a way they’d become used to. In addition, the current cost of living crisis means there’s also a lot of people experiencing financial difficulties which are taking them away from the high street lenders they’d traditionally have used before.

While we’ve come out the other side, there are still lots of people who need a different type of lender to help support what they want to achieve, whether that’s moving, refurbishing or refinancing.

LC: I totally agree, Danny. In both Precise Mortgages and Kent Reliance for Intermediaries I have seen a significant increase in cases needing our flexible approach to affordability and underwriting, including factoring in second jobs, tax credits and the self-employed who’ve only got one year’s trading under their belt. As you know, landlords have also been hit hard, with many ICR calculations not achieving the loan sizes required. But how do you see things from a landlord’s perspective and how have you seen them be affected since last autumn’s mini-budget and higher interest rates? 

DB: It’s clearly had an impact on rents increasing quite substantially as landlords try and cover the interest rate rises and achieve the ICR ratios needed to refinance. While some landlords are absorbing increased costs, many are passing them on to their tenants in the form of higher rents. It’s interesting because you can see from rental yields it’s tough to make a property self-supporting in some parts of the country, whereas in other areas rental yields continue to be extremely high.

Due to this, it may have made things less viable for amateur landlords, depending on the type of property. I think some of these properties will return to market and enable first-time buyers to purchase.

LC: That’s interesting. Based on that, would you say the buy to let market is becoming much more professionalised?

DB: I think saying it’s continuing its journey towards that, would be the best way to put it.

I think a lot will depend on when it comes to people remortgaging – what are the rates a borrower will get now compared to what they’ve had? How much of a difference will that make and what can they do to maintain a strong rental yield? While supply and demand is so much out of kilter, there will be a propensity for rents to keep on increasing, but there has to be a limit as to where they can go.

LC: That’s a good point, Danny. If rents continue to rise, there may come a point when some tenants will think they’d be better off buying a house because their mortgage payments are arguably going to be cheaper than the rent.

DB: I’ve read recently the average rent is now more than the average mortgage. As an industry we need to provide more opportunities for tenants to purchase. We’ve seen the recent release of a no deposit mortgage which enables tenants with little or no deposit to borrow enough to get onto the housing ladder. It’s important someone’s seen there’s a segment of society that needs help and is prepared to take a punt. I’d like to see that extended across a wider range of lenders and see a greater criteria range. If more lenders get on the bandwagon, then maybe we’ll see a turnaround in more properties becoming available to rent.

LC: You’re right, Danny. Having viable options for first-time buyers is important. At Kent Reliance for Intermediaries we have solutions to assist, such as enhanced multiples for recently qualified professionals, guarantors, joint borrower/sole proprietor and shared ownership up to 100% of the mortgage share value, all of which support the first-time buyer sector.

Just going back to buy to let landlords though, do you think we’re seeing an increase in the number of landlords diversifying into other types of property, such as HMOs or multi-units?

DB: Among some professional landlords, yes. There was a worry during Covid, a lot of these types of properties were around university towns and weren’t being occupied as students couldn’t physically attend. Fortunately, things seem to have stabilised as life returns to normal, which is good news. Diversifying into properties such as HMOs isn’t going to suit every professional landlord, but there are investors who’ve been able to make the most of new opportunities that are opening up.

LC: That’s very true. We’re seeing a good demand for HMOs and multi-units across all three of our brands, including broken leases where the landlord lives in one of the flats in a multi-unit and then create leases for the remaining units, which we can consider in InterBay. Is the same thing true for landlords who want to buy more commercial or semi-commercial type premises, including those they can adapt?

DB: It’s obvious the high street and the way office blocks are used is changing. I’ve said for a while you could see a time where these buildings get flipped into a more residential-type environment for either purchase or letting. It does make sense to go down that route because what’s the point of having empty properties when we’ve got a housing shortage? Investors should always go into such a project with their eyes wide open though as they do come with their set of challenges. Will you be able to get planning consent? Will lenders lend on it? Is it the right sort of property to convert?

LC: This seems like the perfect opportunity to mention Legal & General’s SmartrRefer option! If brokers come across a case that’s not their normal kind of business and don’t feel comfortable enough to potentially take it to completion themselves, is it right they can use the SmartrRefer panel to help them get it over the line?

DB: Absolutely. Referral partners are invaluable for brokers who want to enter a market or who have a customer that needs some help in a certain sector. Brokers are very knowledgeable, but they can’t know everything about everything, so the ability to be able to hand a case off to a referral partner to get the right outcome for their customer is really important.

LC: I know this month’s Sparks series is all about alternative lending, but what does alternative lending mean to you, Danny?

DB: That’s a really difficult question as there are so many different facets to it. It could be one lender has different criteria and provides an innovative way of doing things away from the norm. It could be another lender offers bridging finance or second charge loans. To me it’s anything that’s an alternative to the high street..

The challenge is making more brokers aware of the support they can offer as not everyone’s familiar with them. Take bridging finance, for example. Not enough brokers advise on it because they’re fearful of it, don’t understand it or just don’t see the need. Not all brokers know what to do with it because it’s not their core bread and butter, which is why our SmartRefer panel is such a great solution.

I also think the green agenda will start to force the industry’s hand on various touch points which will bring new opportunities for these sectors.

LC: That leads me beautifully into what I wanted to talk to you about next Danny which I know is a subject close to your heart – ESG. We’ve spoken about this in the past and you’ve said before it’s all very well properties having an A or B Energy Performance Certificate (EPC) rating, but it’s how the customer engages with the property that really matters.

DB: When the announcement came out, we knew there was going to be pressure on lenders to improve their back book. Off the back of this, we’ve seen some ‘greenwashing’ as a lot of lenders thought it was the right thing to do to reward customers with A-C EPC-rated properties. You can understand the rationale, but as we’ve become more immersed in this as an industry we’re starting to question the methodology – is EPC the right medium?

Ultimately, what everyone is trying to achieve is to reduce carbon emissions and a better EPC-rated property will go a long way in supporting that, but you’re right when you say it’s all about the behaviour of the owner of a property. Is it fair and reasonable a family of five living in an EPC A-rated property who leave all the lights on and have the heating whacked up full blast benefit from a better deal than someone living on their own in a D-rated property who’s quite frugal, turns things off, doesn’t mind the odd draught, but who produces less carbon emissions?

New properties being built are likely to have some form of meter in there as standard, therefore we’ll start getting more accurate data about where the better performing properties are. As a result, we’ll be able to reward the right people for the right reasons.

We’re waiting for the government to make some decisions as we need some clarity about what the measures should be and what the expectations are. Customers are keen to do something, and some already have, but currently we don’t know what the legislation is and until we do brokers need to be careful to inform, not advise. There’s an expectation brokers will be the conduit for assisting customers with this, however brokers aren’t home improvement experts and we’ve got to be mindful we don’t push them down that route. Brokers are there to provide advice and help customers get the finance they need.

If customers want to improve their energy efficiency, they can check their loft insulation and their lighting and things like that themselves, but when it comes to more complex solutions like solar panels and heat pumps then we need clarity because some of these appliances are still unproven and costly to implement.

What we do need is lender innovation to assist those customers who want to improve energy efficiencies, regardless of the government’s timelines.

LC: That’s so true, Danny and it now looks increasingly likely the 2025 and 2028 EPC deadlines that were in place are going to be scrapped. I’ve heard that the government has said it’ll be outlining its updated green agenda timelines by the end of the year.

DB: If they do announce this new agenda timeline at least everyone will know where they stand because until they outline their plans and methodology for assessing properties It’ll makes it hard to advise and hard for lenders to devise products to help customers, as well as deliver the message out to customers to say they need to be thinking about this as part of their home ownership programme.

LC: Absolutely Danny, the more advice and information we can get to customers the better…

DB: Yes, absolutely. It’s just got to be done in the right way. We can’t have brokers having to become home improvement experts; that’s not what they’re here for. Yes, brokers can help and support and make customers more aware, but customers need to be armed with the right information so they come prepared to the broker and say: “We’re going to do this and we’re going to include all of this green stuff. This is what we need – can you help us find the finance to enable us to get it done?”

LC: Thank you, Danny. It’s been a fascinating chat. To finish things off, if you could give brokers any tips, what would they be?

DB: Customers keep changing and brokers need to keep abreast of their needs and the different propositions out there to help meet them. Don’t be afraid to ask questions and don’t be afraid to speak to new lenders who you may not have spoken to before. Do your research, go to events and learn about things outside of your comfort zone.

It’s important to make the very most out of being able to help your customers because with volumes down at the moment, every customer matters. Making sure you’re placed to help them by having that breadth of knowledge and experience will mean you’ll give yourself the best opportunity to be successful and make a difference to people’s lives.

Correct as of 19 June 2023.

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