SLS In Focus: ‘Plenty of positives ahead’ in buy-to-let – Gissing

There’s no denying that the buy-to-let market, specifically the complex buy-to-let market, has been gaining significant traction over the past 12 months. We are seeing a notable pivot to more specialist and complex lending requirements for our landlord clients.

For investors who can afford it, the current economic climate is seeing clients take advantage by snapping up below market value properties and expanding their portfolios, often looking at more higher yielding properties.

On the other side of the coin, investors are facing challenges as a result of varying factors. A good example of this is the fallout that’s occurring from the lack of certainty for pricing or funding following short-term rate volatility.

This leads to rates and products being withdrawn and repriced with very little notice, or sometimes withdrawn for a prolonged period of time whilst waiting for the dust to settle. Unfortunately, this is becoming commonplace across the whole specialist and regulated market.

When exploring the intricacies of a deal, stress testing can be more fickle due to high interest rates and rental income not meeting the required interest coverage ratio. For those in the fortunate position of purchasing, it’s also become incredibly hard to plan and budget for a client looking at a prospective buy as rates change so quickly.

As rates and stress testing continue to fluctuate, buy-to-let affordability is also changing daily from one lender to the next. This is where having access to as wide a panel of lenders in this space is invaluable.

Higher arrangement fees ‘not a long-term solution’

I am aware that lenders are trying to combat the stress testing challenge by shifting their profit margin into the arrangement fees. This helps to lower interest cover ratio, suggesting they’re actively looking to deploy funds. However, the majority of people do not want to pay a five per cent arrangement fee. It’s therefore not a long-term solution to the current issues we’re facing, and is only being taken up by those that feel they are buying at massively reduced value.

When looking at the facilities themselves, some lenders are offering to soften the blow by deferring interest, as opposed to upfront fee payments. This offers its own challenge as many applicants do not want to fix high rates in for 5+ years to achieve a lower stress test.

Looking at remortgage clients, many are being told their property rental income no longer supports the mortgage debt they hold. This requires a large overpayment to reduce the outstanding balance otherwise they may effectively become a mortgage prisoner on the lenders standard variable rate. This is also more common amongst Specialist BTL lenders, as they don’t all offer product transfers. Luckily more now do, but for those that don’t this is causing some real problems.

Commercial properties are also being impacted. Typically, they have low-yielding assets, this is spurred on by a declining high street as well as the cost of living crisis reducing commercial/retail footfall. EPCs are also playing havoc as we quickly approach the deadline for all properties to be a C or above, no doubt having an impact on mortgage rates moving forward.

‘Plenty of positives ahead’

However, whilst the general outlook may seem a little ‘doom and gloom’, there are plenty of positives ahead. Something we have noticed recently is that a number of large banks have acquired specialist lenders. This provides more certainty of funding and – due to their size – cheaper funding too. Examples include the recent acquisition of Fleet by Starling, Kensington by Barclays and Shawbrook buying The Mortgage Lender. This has also helped to increase the number of product transfer options available in this sector.

Similarly, lenders are getting more creative about how clients can achieve the leverage required, such as taking additional security. I believe this is a true positive step in the right direction and may even be a shift towards lenders increasing their flexibility moving forward.

The value of experienced brokers and good broking is once again proving its worth with landlords actively seeking specialist advisers who can navigate the market successfully. As cases become more challenging and the client profiles become more sophisticated, the difference between securing or losing a deal can come down to the broker and what previous experience they have come across before.

As my final thought, I believe that to get the market back on track we either need to see land values and property values drop, or rates being restored to more affordable and stable levels (hopefully the latter!). Until then, we may be in for a bumpy ride but one where the value of good advice has never been more important.