This week Moneyfacts revealed that the typical rates charged on buy-to-let mortgages have started to drop, while there has been a significant improvement in the number of products on offer.
Despite this, brokers told Mortgage Solutions that stress test calculations and product fees mean that actually getting deals over the line is an uphill battle.
A shock to the system
Richard Campo, founder of Rose Capital Partners, said that demand is “fairly muted” across the board from landlords at the moment, noting that even with interest rates having fallen they remain at a 13-year high which has been a “shock to the system”.
However he noted that rental yields are very strong for those able to get into or stay in the market, so he expects to see activity pick up.
“Despite all the challenges, it is an excellent time to buy a rental property. Prices are soft, yields are high. Such is the herd mentality that when the market picks up next year people will be in a rush to buy but the best deals will have already gone to those who purchased this year or even earlier,” he added.
Putting the stress in stress testing
According to Campo, while the pricing on buy-to-let deals is “fine” at the moment, the real issues lie in the stress testing and fees.
He explained: “If a lender offers a rate at 4.64 per cent on a two-year fixed rate but the ‘stress rate’ is north of 8 per cent and comes with a five per cent arrangement fee, it is a hard sell. Higher earners are also disadvantaged as they tend to have a higher ICR of 145 per cent, which also highlights how complex some lenders’ criteria is as the stress test they apply varies based on income, type of loan and product chosen.”
What is buy to let?
Buy to let is “virtually non-existent” at the moment for anything but product transfers or those with low gearing suggested Craig Fish, director of Lodestone Mortgages and Protection.
He echoed Campo in pointing out that the stress test and rental income calculations are a problem “so it’s virtually impossible to make the numbers work”.
Steven Hargreaves, mortgage and protection adviser at The Mortgage Co, explained that while buy to let traditionally accounts for between 25 per cent and 30 per cent of his firm’s business, that has plummeted to less than five per cent this year.
He continued: “We are still getting a similar number of enquiries, but once rates, product fees and stress rates are taken into account, very few get beyond the enquiry stage.”
Working with existing landlords
Michelle Lawson, director of Lawson Financial, noted that while she was still doing a lot of buy to let, it was primarily focused on remortgages for existing landlords.
She added: “Unless the Government, current or incoming, makes the appropriate changes to the sector and pledges to support the Private Rental Sector (PRS), things are going to continue slowly.”
It was a similar story for Hargreaves, who said that the bulk of buy-to-let business had been with existing landlords.
“Existing buy-to-let borrowers are having quite a shock when their current deals come to an end with the interest rate increases, albeit with most of these clients’ rental income in the same period has increased. Lenders have improved their service levels, which is to be expected,” he added.
Falling rates don’t tell the whole story
Rates may be falling, but that comes with the sting in the tail of much higher fees, pointed out Lawson.
She explained: “These fees are then usually capitalised, which can leave landlords in a sticky situation when coming to review their mortgage options with regards to loan to value.”
What does the future hold?
There was some caution among brokers around what lies ahead for landlords.
Alexander said that landlords face tough times ahead, unless rates and stress testing improves.
This was echoed by Fish, who argued: “Landlords are not going to have it very good over the coming year until we see rates drop further and lenders ease their stress test calculations.”