Three things that will influence the BTL mortgage market in 2023 – Rowntree

This looks set to continue and, with such a dynamic market, I foresee another busy year ahead. Here, I outline three key buy-to-let mortgage market influences for 2023.

Remortgaging to dominate market

The five-year fix has been the mortgage of choice for buy-to-let landlords ever since 2017 when the Prudential Regulation Authority (PRA) implemented changes to underwriting standards that coincided with the rising rate environment of the time to increase the appeal of longer-term fixed rate products.

This means that 2023, like last year, will see a substantial number of customers with five-year fixes that are reaching maturity.

Speaking to brokers as part of research for our Mortgage Intermediary Insight Report, we know that many are well tuned-in to the challenge this poses to their clients, so are being proactive and discussing plans well in advance of mortgages maturing.

Stress testing key factor

Being closely linked to remortgaging, I think that stress testing will have a notable influence on the market in 2023.

As part of the PRA’s enhanced underwriting, as buy-to-let borrowing swelled, stress tests were introduced in response to concerns that lender credit standards would fall, and landlords would buy during a boom and sell once that turned to a bust.

The Interest Coverage Ratio (ICR) calculations used by lenders to ascertain whether interest on mortgage payments will be covered by the borrower’s rental income are influenced by forecasted market conditions. This means that during 2023, with the current economic challenges expected to linger, the large numbers of landlords coming off fixed rate deals and looking to refinance will be faced with higher rates than those they were subject to when their affordability was initially assessed.

This highlights a need for forward-thinking finance, that not only takes account of the borrower’s place in today’s market but also considers their future needs. We saw this start to shape behaviour last year and will continue into 2023, with brokers increasingly assessing things like product switching opportunities when sourcing the best products for their clients.

Brokers will place increased emphasis on service

Service is always important but the unusually volatile market we faced last year caused issues that may stick in the memory and influence broker decision-making in 2023.

Sudden and significant rate revisions like the ones we were subject to in 2022 force lenders to withdraw products or incur losses that have the potential to undermine the stability of the sector. This placed lenders in the position of trying to balance giving the market prior notice and managing the spikes in business that occurred as a result, with occasions where abruptly pulling products was the lesser of two evils.

This left brokers understandably frustrated. Many seemed to acknowledge the dilemma facing lenders, but this would do little to help clients who anxiously waited to find out if the mortgage they had applied for was still available.

Speaking to brokers and reading their accounts shared online, I think those that felt lenders had fallen short will place an increased emphasis on service, prioritising reliability and transparency, when placing business in future.