The past couple of years have been somewhat unkind to buy-to-let landlords, bringing a raft of stricter underwriting standards and significant tax changes into the equation. Just as the changes have resulted in many buy-to-let being driven out of business, thousands more are being forced to rethink their strategies and portfolios.
One specific area that seems to have become a key consideration for landlords up and down the country is the conversion of properties into houses in multiple occupation (HMO). In the simplest of terms, this is where a standard dwelling is converted in a manner whereby it enables multiple tenants to reside within the same property who are not part of the same group or family. As a means by which to deal with tax increases and make improvements to rental income, HMO is proving to be an effective and appealing option for a growing number of buy-to-let landlords.
“Many landlords are realising that the returns from an HMO far outstrip those of a single dwelling” commented Rob Derry, managing director of Brunel Mortgages.
In order to make the required adjustments and modifications to convert properties for multiple occupation, buy-to-let are exploring alternative financial products and solutions to secure the required capital. In many instances, second charge loans and mortgages are proving to be extremely popular among those looking for longer repayment terms, while bridging loans are being chosen by landlords intent on repaying the borrowed sum over a much shorter period of time.
In both cases, the second charge borrowing market is being bolstered in a big way as landlords continue to explore all available avenues to cope with escalating costs and pressures.
“The second charge market does have a great opportunity to bring some new innovative products to the table on the back of this shift in focus, something the Financial Conduct Authority has been crying out for since Mortgage Market Review was introduced,” said Sebastian Riemann of Libra Financial Planning.
“There is a huge potential to move away from commercial lending and given the higher pricing in these, the potential is for a very healthy profit margin,”
“These types of investments aren’t for everyone, but those who take advantage are able to explore a lucrative market.”
Nevertheless, experts for the most part continue to believe that the vast majority of lenders are not being thoughtful, focused or innovative enough when it comes to the second charge products they themselves offer. In order to capitalise on what is seen as an extremely valid yet perhaps temporary opportunity, product innovation is needed on the part of those offering the required financial products. While it may be a strictly limited market, it is nonetheless a market of growing interest and importance to those working in the buy-to-let sector.