Next year will be ‘survival of the fittest’ for landlords unless lenders innovate – analysis

Matthew Jackson, director at Mint FS, said demand had been “really high” for complex buy-to-let investments this year, despite challenges of down valuations for multi-unit blocks, student lets and houses in multiple occupation (HMO).

He said he expected this to remain high for the coming year.

Jackson continued: “Products have of course increased in pricing and lenders are underwriting with a more specific focus on the landlord’s experience and looking much closer at their portfolio, but this is to be expected.”

Justin Moy, managing director at EHF Mortgages, said there had been an “unprecedented increase” in applications for limited company buy-to-let mortgages and portfolio landlords looking to raise more money for future purchases.

“Many of our landlords have also been turning to auctions to source better value property and are more open to bridging finance options unlike before,” he added.

Moy said looking ahead professional landlords will “continue to look for those bargains and opportunities” as predicted house price changes pull through.

However, he warned: “For those smaller landlords, many will look to exit this market as costs increase and monthly profit dwindles.”

Mike Staton, director at Staton Mortgage said a simple buy-to-let case in 2020 had now become a complex buy-to-let case.

“There is going to be huge demand from landlords, fighting to get the best deal out there as lenders tighten the screws on affordability. Portfolio landlords are being hammered and you can see why many of them are looking at an exit strategy.

“Looking at mortgage rates and affordability tests for buy-to-let landlords at the moment is as cringeworthy as inviting Salt Bae to a World Cup ceremony,” he explained.

Stress tests will be make or break

Emma Jones, managing director at When The Bank Says No, said most lenders needed to reconsider their stress testing as rates had been falling slightly since the mini Budget.

Stress rates reached seven or eight per cent, with brokers at the time saying that buy-to-let applications were harder to complete, especially if larger loan sizes were needed.

Staton added that lenders have been “given the ability to scrap stress testing” so they should “look at ways to make it affordable to keep the landlord market alive”.

“To say the buy-to-let market is not regulated, lenders have created a hell of a lot of red tape and hoops for landlords to jump through. It feels like these lenders are committing mortgage suicide by turning these clients away,” he commented.

Jackson agreed and said investments which “avoid the challenges of ramped stress testing will become more attractive to savvy investors”.

Moy added that the “challenges are always going to be on stress tests”, and “allowing landlords to maximise their borrowing opportunity”.

He said with rents increasing this would “happen organically”.

Figures from Zoopla revealed that rent as a percentage of earnings as a single earner reached 35 per cent, the highest level for a decade.

Lenders will have to innovate as they are ‘forced to compete’

Riz Malik, director at R3 Mortgages, said the complex buy-to-let mortgage offering should “improve next year” as “lenders innovate and are forced to compete”.

He continued: “Lessons have been learned from the fourth quarter of 2022, and many mortgage prisoners will need to be rescued. Trying to place cases remains difficult, particularly for portfolio landlords who will be reassessing their holdings. Next year will truly be a case of survival of the fittest.”

Amit Patel, adviser at Trinity Finance, said there would be opportunities next year as landlords look to diversify portfolios and expand into the multi-unit freehold blocks, holiday lets and semi-commercial due to more attractive rental yields.

“I expect the biggest growth to be in bridging finance in 2023 as savvy property investors look to complete transactions as quickly as possible. In addition, buy-to-let refurbishment mortgages designed to help landlords to improve the condition and EPC rating of a property will become popular,” he added.

Patel said“product innovation will be key” for lenders and he would “not be surprised to see more lenders enter this specialist space”.

Jackson said he expected to see more demand for holiday let, Airbnb and small HMO properties for student lets and professional letting.

He added that he would ideally like to see “more choice of lenders in this space”.

Jones continued that new products and lending criteria will be launched by the end of Q1 2023.

“It would be interesting to see if that’s in the favour of landlords like we hope as the cost of buy-to-let mortgages is only going to hit the tenant.

“With the cost of living crisis likely to be setting in, in the new year that’s only going to put more pressure on the tenants. Making it even harder to save for a deposit for those looking to get onto the property ladder,” she explained.

Landlords looking to specialise need ‘quality broker’

Austyn Johnson, founder at Mortgages for Actors, said the space would “always be popular due to the multiple property remuneration” but it could be challenging to enter for landlords as it required a quality broker.

He continued: “When they find one, they are loyal. Lenders such as Landbay, Paragon and Quantum are already great lenders for this type of thing. If lenders followed their lead, the complex buy-to-let space would be easier to navigate.

“That aside, it also requires a good broker to be able to explain the client’s situation and circumstances to the lenders, it’s no good hoping they will do it themselves. Especially with multiple streams of income.”