SLS In Focus: Is there a ‘calmer sea’ on the horizon for complex BTL? – Hardman

The waves of business have been a constant challenge within complex buy to let, but are we seeing a calmer sea in the market?

In a volatile, rising rate arena, mortgage business is currently written on sentiment and emotion, especially where timing is concerned. Whether it’s residential, vanilla or complex buy to let, no-one wants to miss out in this market, so clients are minded to act early and quickly where volatility is present and lenders are withdrawing rates and repricing in an upward direction.

And, of course, we know that brokerages UK wide are also (very much) expected to act quickly and early where disappearing rates are concerned. Plenty has been said on the subject and I for one don’t want to push the same 48-hour window requirement to lenders for rate withdrawals. I think it would only serve to increase rates further across the board (in an insurance sense) and stifle competition if lenders are forced to keep their doors open for longer than they wish to.

In the buy-to-let world as we know, a change of rate in an upward direction is often likely to mean a decreased loan. Who wants to call a client and explain not only did we miss the rate, the interest costs are increasing, but the loan size has dropped equalling a shortfall? It’s a rhetorical question, we know the answer.

Lenders have been forced to increase arrangement fees in an effort to retain some level of palatable interest coverage ratio (ICR) test. Who would have thought five or seven per cent arrangement fees would be pretty common to see in the complex buy-to-let world?

But in many cases, I’m afraid to say that it’s needed. In the not-too-distant past with the best stress tests out there, £1,000 in monthly rent would generate £240,000 in loan size, the same £1,000 now would generate around £170,000. So, a property renting for £2,500 a month, could be staring at a sizeable £175,000 loan gap.

Not hard to see why decent value single self-contained properties are the preserve of the past and are increasingly ‘under the cosh’ loan-size wise. How will this look for tenants who have families in and around the capital?

Back to the deadlines. We live it, witness first-hand the frustration at times, not just to submit business and ‘secure rates’, but to get cases offered in certain timescales with certain lenders. Even when the clock is ticking on the lender’s side, ironically, at times it can be their deadlines alongside their own service frailties causing issues. Certain lenders funded through wholesale markets must be acutely aware that their model is faltering at times here, since there are too many third parties at play to be able to control timescales to this degree.

During volatile times, specialist advisers should be looking more and more at how lenders are funded here; fractional reserve balance sheet lenders or wholesale market/securitisation lenders. Is there surety of funding at the quoted and submitted rate? Or will the dreaded phrase simply be uttered by some: “pick a new rate”. Many wholesale funders lenders handle this well given the significantly heightened cost of funds, others not always so.

Swap rates have dropped from peak but clients still have ‘wait and see’ approach

However, we’re in a current state of flux now. Swaps have dropped from their peak. Compared to a month ago, they are still down 0.26 per cent for two years and 0.17 per cent for five-year deals at the time of writing (not necessarily as you read). Are we starting to see the waves settle somewhat?

Where lenders’ emails are concerned, to see the word “reduced” in an outlook subject line looks strange but welcome. Undoubtedly, advisers and case managers across the country require this breathing space. But I wouldn’t advocate it for too long.

Because if we ask ourselves – where does clients’ human emotion sit now? It sits firmly in the ‘let’s wait and see what happens’ bracket. So those with six months until their rates expire will likely sit on their hands – for now at least.

It’s August after all. A typically slower time. Beaches become the norm, a different type of wave.

When we read the press, the landlord often gets the dodgy end of the stick, but it’s high time the government starts thinking the more they bash the landlord, the more they bash the tenants. There is and always will be an inextricable link. After all, many landlords are providing housing for local councils whose ‘roof over the head of those in need’ facilities are so very lacking.

I, for one, say we waited too long to raise rates, and now we seem to have this one-and-only lever to pull to halt inflation. This one-sided approach could well likely create further more wide-reaching economic negative impact, we need to wait and see what the impact of 14 base rate rises in a row and what a 5.25 cent base rate results in. However, looking across the pond to the Fed, they are still raising rates despite considerably lower inflation figures than the UK.

Rates expected to rise further so back to ‘familiar rhythm’

So, when will the next wave of business start?

For our advisers in Southport, we’re used to waves, however usually they are two miles out and you have plenty of time to prepare for them heading in. In the complex buy-to-let sector, we haven’t had much time to prepare in recent history and with rates expected to rise further, it likely won’t be long until we are back in the familiar rhythm.

In the meantime, the non-rhetorical question that our government needs to consider: how many landlords will wave goodbye to this market post-Section 24 tax changes, supposedly impending EPC requirements and rapid interest rate increases and resulting ICR reductions – and just as importantly, if not more – how big will the resulting detrimental impact be, for the future of the private rental sector?

Whilst that question is pondered, complex buy-to-let advisers UK wide will continue to do all they can for their landlord clients and hopefully enjoy the challenge that the market brings in the near future with a little less volatility appreciated.