High ICRs will have ‘sizeable’ impact on PRS – The Buy To Let Broker

So, how big a mess is this creating in the private rented sector?  Well, if you own property personally and let an averagely geared property to a family, a pretty sizeable one.

It’s restricting choice and forcing many to bite the bullet on a product transfer (assuming they can) for the next couple of years in the hope that inflation finally gets low enough that bank base rate can perhaps start to ease.

The sector has proven time and time again to be resilient in the face of upheaval despite the many seismic changes that the buy-to-let sector has had to face over recent years, but will this be enough to see many exiting the sector?

Absolutely it will, yes.  Especially where Section 24 is already biting landlords heavily and in some cases clients given rate rises that don’t enable them to see a monthly passive income even before tax.

Understandably, landlords and brokers are currently feeling unprecedented pressure with stricter stress testing and higher priced funding than many are used to. Quite simply, landlords are not now able to borrow as much as they were previously, based on a given rental income.

Taking buy-to-let stress rates in isolation for a second, due to the vast number of factors that now need to be considered, there are no average stress rates that you can simply throw out for comparison. The criteria of the distant past; 125 per cent of the mortgage payment is laughably simplistic by today’s complex methods.

Is the case a like-for-like remortgage or a purchase? Can we top slice based on personal income? Is the case limited company or personally owned? What are client preferences surrounding products? These are just some of the initial questions that now need to be considered and answered before any kind of comparisons can be made.

The only true way to get a good reflection of current stress rates is to look at each detail of a case alongside individual products and compare on a case-by-case basis, obviously creating a huge amount more work for brokers.

Clients should look at portfolio ‘holistically’

But what can we do to make life easier for our landlords and help them combat this period?

What we are advising clients to do is to look at their overall portfolio holistically and then advise in line with their investment goals. As specialists in the buy-to-let sector, it is our place to help clients raise funding but the client has to marry that with what is ethical and right for both their tenants and properties.

For example, if it is a single self-contained property or in personal name, it is likely to be more difficult to raise any amount of finance right now against rental incomes. This means that we are having to look at different ways to place cases. We’re having to review cases more holistically, perhaps look at balancing debt across the background portfolio where possible, or consider top-slicing to satisfy stress test affordability and to better advise and help them achieve the desired funds they need.

Additionally, we’ve seen clients turn to higher yield models  and have been doing so for years and house in multiple occupations (HMO) or  multi-unit freehold blocks (MUFB) have become the battle sword.

More than ever, brokers need to be proactive in their advice, reviewing all available options for clients as opposed to delivering a transactional service. Whether it’s providing a clear comparison of current fixed versus variable rates, considering different initial benefit periods to support the client’s long-term goals or even offering different lender options.

Indeed, active conversations surrounding the options need to ensue, can clients inject capital into the offering to allow exactly what they need?

Without a shadow of doubt, it now takes a lot more work to place a deal in the current market. What works for one client may not work for another and we are having to support and educate the clients more on the merits of considering things like higher arrangement fees to compensate for the high stress testing and allow them to still raise the capital that they need.

What does the future hold?

Given the volatility of the market that we have seen of late, there is no way to predict what the coming months have in store for the sector and for landlords, but I truly believe that through broker collaboration, transparency and lender product innovation, we will, as always, weather the storm.

Landlords have been hammered so much over recent years, we need further innovation and support on a governmental level and we also need lenders to continue to innovate as they have been doing.  y supporting landlords through this period, we undoubtedly support the wider private rental sector as a whole.