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The BTL mortgage industry explained - advice for landlords.

The BTL Mortgage Players

Firstly it’s helpful to see where landlords sit in the buy-to-let mortgage industry; and it is an industry.  Buy-to-let mortgages now make up over 10% of all mortgages. Council of Mortgage Lenders (CML)

In essence the buy-to-let mortgage industry has three players:

  • mortgage providers - such as building societies that provide mortgage funds and package the products;
  • the mortgage intermediaries - the people that sell the products and give advice
  • mortgage consumers -  the purchasers of the mortgage products i.e. landlords

The arrangements in the buy-to-let industry are slightly complicated in that some of the so called mortgage providers like the building societies will sometimes sell direct to the consumer and not through a mortgage intermediary. 

Most of us are now savvy enough to shop around amongst various BTL providers to ensure we get the best deal. Hence we go to an intermediary such as a  mortgage broker, who offer a range of products from a variety of BTL mortgage providers.  Buy-to-let mortgage brokers can be office based but increasingly operate through the Internet.

Why intermediaries?

Most mortgage providers like having intermediaries because it means they save on marketing expenses, relying instead on these agents to do the selling work for them.  It also means that the intermediaries can filter the applicants to ensure that they meet the lenders criteria and then deal with all the initial form filling to ensure that any application is made correctly.  The reward for all this is that most BTL landlords pay the intermediary a Procuration fee or commission – typically around 0.3% - 0.5% of the BTL loan amount.  The intermediary then also generally gives advice to the consumer.  In most cases they charge a fee for this; the brokers fee. 

This is the basic structure of the industry, although there are variations in the business model with some BTL mortgage companies choosing to sell direct to landlords.  Some of the mortgage comparison sites act as the intermediary, but without offering advice.  They allow the consumer to select their own products.  They receive their revenue either each time a product is sold, or when a lead is passed through to the mortgage provider.

Potential conflicts

One of the potential conflicts with a broker based system is that the mortgage broker is in a position of trust. The landlord relies on the mortgage broker to recommend the best product and not necessary the buy-to-let mortgage for which they receive the highest commission.  There may be conflicts where there is very little in the interest rate charged by a number of BTL mortgage products, but one BTL lender pays a much higher commission.  In this case a landlord will need to trust their  BTL mortgage broker to do the right thing.

The other aspect that a landlord should be aware of  is that it is difficult to know how many mortgage companies the mortgage broker has access to.  They might give a landlord best advice but if they only have 5 mortgage companies on their books compared to the 50 odd out there, then their BTL mortgage advice and a landlords choice will inevitably be limited by this.

Buy-to-let mortgage brokers frequently advertise themselves as offering whole of market advice, however this may be technically true but how many BTL mortgage brokers are likely to register with a buy-to-let mortgage provider that pays no commission?

Regulation
Before a landlord buys anything it is useful for them to understand how the buy-to-let mortgage market operates. 

Most of us have heard of the Financial Services Authority (FSA).  It was established by the Government to protect the interests of consumers and it now regulates a whole host of financial products from pensions to residential mortgages.  However, at the present time, buy-to-let mortgages are not regulated by the Financial Services Authority (FSA).  This is because they are classed as a commercial product.  The assumption is that people operating in this sector are ‘commercially aware’ and do not need the same level of protection.  There is a trade body called the National Association of Commercial Finance Brokers (NACFB) which some mortgage brokers belong to.  Membership is voluntary and it sets out guidelines for its members to operate within.  However, Landlords should be aware that they have no direct powers to act in the consumer’s interest against anybody that breaks this code although it does have its own complaints and disciplinary procedures to product landlords against unacceptable working practices by any of its members.

Although buy-to-let mortgages are not regulated by the Financial Services Authority, they are still covered by the Financial Ombudsman Service (FOS).

This means that by going through a BTL mortgage broker and  receiving advice, a landlord has a degree of protection against taking the wrong product or a bad deal, as opposed to none if a landlord goes it alone.  Complaints against mortgage brokers are independently reviewed by the Financial Ombudsman Service (FOS), using the principles of  Treating Customers Fairly, which cover such things as the way that a deal was marketed to a landlord, whether a landlord received sufficient information to make an informed decision, whether they were aware of all of the costs involved in the transaction and so on.

Positives 
Things are not all bad.  It is exactly because of this light regulation the UK has one of the most competitive mortgage markets in the world resulting in a constant array of new and innovative buy-to-let products. 

Unfortunately light regulatory touch also means that there are a few ‘dodgy’ operators out there that can exist legally and make money out of naive landlords.  Therefore landlords need to be wary about who they buy through and how the BTL mortgage product is sold.  The secret to successfully purchasing any product is to understand how the market works so that you as a landlord can make informed decisions.

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