At the time of writing this, rates appear to have settled into a new normal with five-year fixed rates as low as 4.69 per cent for 75 per cent loan to value (LTV) from the high street. Some specialist lenders have also managed to get their five-year fixed rates below five per cent by charging a higher than standard fee.
This is quite a critical tipping point, as specialist lenders generally utilise the Prudential Regulation Authority (PRA) rule, which allows affordability to be calculated on the actual fixed rate taken rather than a notional rate.
To keep the rate below five per cent, specialist lenders currently have to charge arrangement fees of three per cent or higher. While this may seem inappropriate, it does mean a more significant percentage of buy-to-let mortgages can proceed at the required borrowing level.
When discussing the higher fees with their clients, advisers can explain that the higher fees allow landlords to have some of the mortgage cost come out of future capital growth rather than the rental income today.
Interest rates settling has prompted rise in enquiries and applications
The settling of interest rates has seen an increase in enquiries and applications compared to the end of 2022.
However, some buy-to-let mortgages will still struggle with affordability, particularly when a landlord comes to remortgage a buy-to-let originally based on the affordability of a five-year fixed rate taken in the past at just three to four per cent.
A recent survey by Landbay reveals that the majority of landlords do not intend to sell their properties, which is promising, but how can advisers help landlords who think they do not have an choice?
If a landlord is unable to reduce the loan they have, advisers may be able to help some by suggesting alternatives. For example, would the property lend itself to multi-letting or converting into a formal house in multiple occupation (HMO), increasing the rental income?
Advisers can also assist landlords by reviewing the portfolio. Is there equity that can be raised on an alternative property, perhaps with a second charge, to cover the shortfall on another?
Brokers should be aware of pros and cons of different strategies
To guide their landlords this way, advisers should ensure they fully understand the pros and cons of each suggested strategy. For example, helping their client to understand the key points around HMO legislation.
If this is not the adviser’s strength, it is worth considering working with a specialist referral partner or distributor. It is also worth keeping an eye on new initiatives as lenders continue to innovate to help more customers and gain market share. For example, many more lenders now offer some form of top-slicing solution.
This means rental shortfalls can be covered by income, although the terms vary greatly from lender to lender, again, a specialist distributor can help you uncover which could work for your customer.
2023 may still have challenges for the buy-to-let market, but I think we are now on a more even footing, and it will be much more positive than originally envisaged.
