Buy to Let Affordability
Buy to Let Affordability faces a significant test as the entire mortgage market grapples with the impact of rising interest rates. This challenge is further compounded by market volatility, and even the buy-to-let (BTL) mortgage sector has not been immune. Specialist lenders have been particularly affected in this sector due to the intricacies of their product offerings and the turbulence in swap markets.
Challenges Faced by Mortgage Advisers
Mortgage advisers specializing in Buy to Let Affordability have had to confront several hurdles during this period of market flux. The unpredictability of rate adjustments has necessitated rapid application submissions, often with less preparation time than desired. This heightened pace can increase the likelihood of application errors, and some lenders have shown limited flexibility in addressing these mistakes. Consequently, advisers have sometimes had to resubmit applications, leading to the loss of favourable rates.
Market Stabilisation but Affordability Concerns Persist
While there have been signs of stabilization in the mortgage market, concerns surrounding Buy to Let Affordability persist. Since the Prudential Regulation Authority (PRA) introduced affordability rules for Buy to Let in 2016, 5-year fixed rates have remained popular. These rules require affordability calculations based on rates rising to 5.5%. However, the current landscape sees new 5-year fixed rates that often surpass this 5.5% benchmark due to the upward trajectory of interest rates.
Impact of Discount Rates
While cost-effective in the residential market, discount rates have introduced complexities for Buy to Let Affordability. Many lenders in the Buy to Let sector have adopted notional rates considerably higher than the PRA’s 5.5%, with some even reaching as high as 8.5%. This elevated notional rate pressures new purchasers’ loan-to-value (LTV) ratios downward. Additionally, property investors who recently used bridge financing to acquire properties may now grapple with challenges in raising sufficient capital to repay these loans.
Rise of Buy to Let Mortgage Prisoners
Historically, property investors secured 5-year fixed rates below 4%, and rental affordability was based on these lower rates. However, as these properties approach their remortgage dates, many investors may find it challenging to secure rates that align with their initial affordability. This situation raises concerns about the emergence of Buy to Let mortgage prisoners, which may become more prevalent in the coming months.
Retention Rates as a Solution
In response to these challenges, some lenders, including specialists, have introduced retention rates to assist investors in managing rate increases. Experienced property investors often utilize rate review dates as opportunities to raise capital for property renovations or additional investments. This strategy may gain even more prominence if legislative requirements necessitate property upgrades.
Advisers as In-Demand Solution Providers
As property investors seek strategies to navigate the evolving Buy to Let Affordability landscape, Buy to Let advisers will likely witness increased demand for their expertise. Advisers can enhance their value proposition by deeply understanding potential solutions available within the market. This includes leveraging criteria variations among lenders and staying informed about innovative products introduced by lenders.
Leveraging PRA Like-for-Like Rules
In situations where an existing lender does not offer a suitable retention rate, advisers can explore the Prudential Regulation Authority’s (PRA) like-for-like rules. These rules allow lenders to select the rate used for assessing a like-for-like remortgage, resulting in variations in lenders’ calculation rates.
Exploring Margin Variations
Lenders employ different margin percentages in their calculations, especially for higher-rate taxpayers purchasing properties in their own name. While the PRA’s rules do not prescribe a specific margin for this calculation, lenders may vary between 125% and 145%. Advisers can explore margin variations to optimize affordability based on client circumstances.
Top-Slicing as an Affordability Strategy
Top-slicing, a method that utilizes surplus rent or earned income toward affordability, is gaining traction among lenders. This approach can reduce the margin percentage to 110% with some lenders, offering relief for investors who face Buy to Let Affordability challenges.
Considering Property Use Alternatives
In cases where traditional Buy to Let Affordability remains a hurdle, advisers can guide clients in considering alternative property uses. Holiday lets and houses in multiple occupations (HMOs) often yield higher rental incomes, opening up alternative affordability calculation options. Some lenders, such as HTB and Fleet, offer innovative approaches to assessing affordability for these property types.
Future Prospects Amidst Affordability Challenges
Despite the ongoing challenges in Buy to Let Affordability, lenders maintain a robust appetite for lending. The mortgage market continues to evolve, with lenders planning innovative product launches in the coming months. Buy to Let advisers, equipped with an in-depth understanding of market dynamics and solutions, are well-positioned to assist property investors in achieving their financial objectives.