Borrowing gets tougher for hard-pressed landlords

Borrowing gets tougher for hard-pressed landlords

9:49 AM, 24th August 2022, About a month ago

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Good buy-to-let mortgage deals are getting harder to find, with interest rates rising and products being pulled from the market.

Landlords looking to buy or remortgage face a much more restricted choice as the Bank of England (BoE) starts to hike interest rates.

Data from Moneyfacts shows that the average fixed-rate buy-to-let deal has now passed 4% for the first time since February 2013.

To make matters worse, more than 1,100 buy-to-let (BTL) products were withdrawn from the market in June and July, as lenders streamlined their range.

Lenders warn they are also likely to impose tougher affordability requirements as the cost-of-living crisis builds over the winter.

The average two-year BTL fix (all LTVs) has now risen from 2.97% in August 2021 to 4.04% in August this year, while the average five-year fix has gone from 3.29% to 4.49%, according to Moneyfacts.

Meanwhile the price of an average two-year fix on a loan of £160,000 at 75% LTV has risen from £341 in November 2021 to £529 in August.

Shorter shelf-life

“The average shelf-life of a mortgage product had sunk to a record low of just 17 days at the start of this month,” says Moneyfacts finance expert Eleanor Williams. “In the aftermath of another base rate increase since then, providers are continuing to react with further revision of their offerings.

“We have seen lenders withdraw parts of, or entire product ranges, with a number citing the pause in lending being due to unprecedented demand.”

She warns some landlords now coming to the end of their current deal may receive a shock when they come to remortgage their property. “They may find that rates are some way above what they had been able to secure on their previous product.

“The level of product choice available to landlords has also fallen quite notably of late, as providers have revised and condensed their ranges.”

However, Richard Rowntree, managing director of Mortgages at specialist BTL lender Paragon, doesn’t think it’s cause for panic.

“We’ve seen a streamlining of lenders’ portfolio range and I guess that is to allow agility in terms of having to move quickly because of the volatility in the market, rather than pulling products because they don’t want to lend,” he says.

“I think we should remember, as well, this is coming from a high point in terms of those pandemic years, when the market was especially busy. We saw an expanded number of offers right across the range. That has now reduced. Some lenders have come out completely for a period of time.”

Customers can book deals early

Rowntree is expecting BoE rates to rise to about 3%, and come back down to 2.5% once inflation is under control.

Does this mean that borrowers with fixed-rate deals ending in the next few months are going to suffer?

“I wouldn’t necessarily say that,” he says. “They need to get organised and look at this now. We are mindful of this, so for existing customers we have extended the period they can book their new fixed rates from three months to six months. We were the first specialist lender to do that, because we could sense the uncertainty over where rates were going to go.

“We are trying to minimise that payment shock for our landlords. We’ve done some analysis for our landlords, and if you took a fixed rate five years ago and you are coming up to maturity now, it’s an average £68 increase on today’s rates compared with five years ago. Certainly the increase in rents we see would cover that.

“Where this goes we’re not quite sure, so if you continue to see rates increase for the next six months our advice is to remortgage sooner rather than later.”

Affordability will get tougher

When it comes to affordability, Rowntree says Paragon is at the “prudent end of the market” and adds a buffer to the regulatory requirement.

“What we want to ensure is a future affordability test to make sure that if you don’t switch to a new product or remortgage away, that you can still afford this based on a reversion rate [when a fix ends], and clearly where SVRs are increasing that’s becoming an increasingly difficult test to pass for some landlords.”

He adds, however, that for customers not taking any additional lending, there isn’t a requirement to reassess income when a fixed-rate deal ends. “If you are doing pound-for-pound remortgaging or switching, there are no barriers.”

Landlords who run properties through a limited company may find the new environment less stressful than those letting as an individual.

“Affordability tests in rising interest-rate environment tend to hit harder if you are borrowing in your own name, warns Rowntree. “If you are incorporated, on limited company lending you have more opportunities to offset tax, so there is flex in there. But if you are a higher rate taxpayer looking at BTL now, I think it’s difficult to make that stack up.”

So would he advise landlords to look at incorporation? “It depends on individual circumstances, and it’s important to get advice,” he warns.

“We have seen a shift towards incorporation, and if you look back, during the Covid years, other than online businesses, the second biggest start-up sector in that period was SPV [special purpose vehicle] limited-company lending with the purpose of holding residential property.”

Rowntree does believe, however, that some of the doom and gloom headlines are overblown.

“In terms of the performance of their portfolios, landlords are more experienced and more resilient, they are not as highly geared as they were during the financial crisis, and the underlying demand for rental properties is significantly up on the five-year average. So there is underlying demand, reduced voids, and it’s very strong.”

However, he warns the supply of rented accommodation is falling as landlords leave the market. “There is no doubt about it – we have seen a 39% reduction in supply over a five-year average,” he notes.

His fears are echoed by Eleanor Williams at Moneyfacts: “Rising interest rates and the supply of products are not the only factors that may impact landlords, as tax changes and the cost-of-living crisis may already be impacting the potential returns available for those invested in property,” she points out.

“Some landlords could feel that, coupled with other changes such as Stamp Duty surcharges, this is creating a ‘hostile’ environment, which could see some consider leaving the sector altogether.”

Landlords can only hope that the incoming housing minister in the new administration will be more ready to listen to their concerns, both over the Renters’ Reform Bill and the increasingly onerous climate forced on them over the past few years.

If they seriously want to deal with the housing shortage and reverse the decline in rented accommodation, the government need to start listening.

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