Vulnerable tenants: what brokers need to know

By Chris Daly - Managing Director for Specialist Mortgages, Hampshire Trust Bank

Understanding how lenders appraise cases involving vulnerable tenancies, and indeed what is actually classed as vulnerability, is crucial for mortgage brokers active in this space.

It's only by working with lenders who truly understand this market, and who have built the best possible team and processes to support such lending, that brokers and their clients can secure the vital funding needed to deliver for vulnerable tenants. 

The first issue for brokers to consider here is what actually counts as a vulnerable tenant. 

A vulnerable tenant is defined as a person who is at greater risk of harm due to their circumstances, who may be limited in their ability to care for themselves or protect themselves from harm or exploitation.

There are many different examples of properties designed to house vulnerable tenants which brokers will be familiar with, including those where 24-hour or live-in care is provided, properties delivering emergency housing accommodation, or those providing housing for rehabilitation or social transitional purposes. 

What brokers need to consider

There are certain key considerations brokers must bear in mind with these cases, in order to ensure that attractive deals are able to reach completion and do not fall through the cracks. 

Understanding the borrower, and lender's attitude towards them, is the first step. For example, at HTB we don't lend to landlords who let directly to vulnerable tenants, but instead to landlords who work with the right sort of organisations to then sublet to tenants with some level of vulnerability. 

Checking whether the tenant is overseen by some sort of regulator is also important. Regulated tenants include those working with local authorities and registered housing associations. These tend to be more straightforward for lenders since there is greater regulatory oversight not only of the quality of the service but in some cases also the financial viability of the business.

When the tenant is unregulated, there are likely to be further criteria which need to be met in order to secure funding. At HTB for example we look for a minimum of five years' track record, as well as a strong financial profile. 

Unfortunately, this is a segment where there have been serious problems, with the National Audit Office pinpointing a growth in poorly managed and poor quality accommodation. Until that is tackled by legislation currently working its way through Parliament, lenders will continue to adopt a more cautious approach towards cases involving unregulated tenants. 

Finally, there is the question of market rent. It's vital for advisers to understand that when assessing vulnerable tenant cases, lenders will use the lower of the market and passing rent, rather than any actual rent agreements in place, to determine the terms of the loan.

While it is common for these agreements to be at much higher levels than market rent - we have seen situations where it has been double in fact - there are no guarantees that leases from tenants will be renewed at these higher levels. Any responsible lender will want to avoid the client being over leveraged, which is why it's important for decisions - and therefore the advice from the broker - to be based on market rent instead. 

Working with lenders that understand vulnerability

This is undoubtedly a specialist area of the housing market, and for lenders to work effectively in it requires real expertise. 

It's only by utilising the knowledge and experience of industry experts and crucially what borrowers and brokers active in this sphere are looking for, that lenders can deliver products and processes which will truly meet those needs. 

We are unlikely to see falling numbers of vulnerable tenants in the years ahead, which means there will continue to be opportunities for landlords from providing suitable accommodation. 

Given the prospects for growing interest in the vulnerable tenant sector from investors, it's crucial for brokers to identify and work closely with lenders who understand this market and are best placed to deliver for landlords.