I recently read an interesting article in The Times, titled Don’t expect a return to pre-Covid interest rates.
While rates have normalised following the systemic shock caused by the mini Budget, the bite-sized economics education piece explained why we are unlikely to see them fall to the levels seen in the period between the Global Financial Crisis (GFC) and May 2022, during which base rate never climbed above 0.75 per cent.
While this is good news for savers, it presents more of a challenge for buy-to-let landlords. Landlords who are remortgaging are likely to face product rates higher than when they originally secured their finance.
Maturing in a new landscape
Some attempting to remortgage to a new lender have also faced challenges as higher interest cover ratios (ICRs) have been introduced following the mini Budget, whilst the product rate is generally higher.
This could lead to landlords reverting to the lender’s standard variable rate (SVR) product, likely resulting in increased repayments, or selecting products with high fees and lower ICRs as this is the only way to get the sums to work.
Product transfers can offer a solution. This is because the borrower switches to another fixed rate product offered by their existing lender, so a relationship is already there. With that comes an understanding of the lettings business, meaning the process can be completed relatively quickly and easily.
Not all lenders offer product transfers, however, particularly some of the smaller non-bank lenders that operate in the specialist space.
This is why it is important for brokers to consider not just whether a product is best for a client now but also at the end of the fixed rate when movement in the market could effectively mean the goal posts have been moved in terms of affordability.
Thinking ahead
Regularly reviewing portfolios will help brokers to ascertain whether their clients have mortgages reaching maturity and if their current lender offers product transfers.
If so, the process can be started; the business secured for the broker and the risk of reverting to the SVR avoided for the client. If not, the earlier the alternative options are explored, the greater the chance of a workable solution being found.
This proactive approach can benefit both broker and borrower.
Securing a deal ahead of maturity helps to provide an element of certainty for clients, particularly valuable in the current period of economic volatility. Understanding this, Paragon was the first specialist lender to offer product transfers up to six months ahead of mortgages reaching maturity.
For brokers, it can be an opportunity to secure additional business as data shows that around one in four clients take on extra borrowing at the end of term.
Further advance products, for example, can be particularly attractive in the current environment where landlords may need extra funds to improve the standard or energy efficiency of their properties ahead of regulatory changes or capitalise on market conditions to purchase what could be considered relative bargains.
