Buy-to-let watch episode 8
Liz Syms, CEO and Founder of Connect Mortgages
In the latest instalment of our Buy-to-Let Watch series, titled “Buy-to-Let Watch Episode 8 | Why Lenders Are Jubilant In Their Efforts,” we aim to provide our readers with fresh insights following the previous episode titled “Buy-to-Let Watch Episode 7 | Inspiring Bridge-to-let Fills The Gap.”
Let’s start this episode, “Buy-to-let watch episode 8.” The buy-to-let (BTL) sector is grappling with the repercussions of a surge in mortgage interest rates, and specialised lenders in this market are particularly navigating a challenging landscape. This niche market is served by various lenders offering a diverse array of products accompanied by intricate eligibility criteria. However, the intricacies of pricing have proven to be a significant hurdle for these lenders, primarily due to the unpredictability witnessed in the swap markets.
The inherent volatility in these markets has presented BTL advisers with many challenges. Swift rate withdrawals, sudden spikes impacting affordability, increased workloads demanding repeated market research for each case, and sluggish service from lenders contending with their own set of challenges have collectively intensified the complexity of managing this sector.
In response to these challenges, BTL advisers find themselves on the frontline, grappling with the intricacies of an unpredictable market. The rapid fluctuations in mortgage interest rates have necessitated constant vigilance, as rates can be withdrawn with little warning, creating a dynamic and demanding environment for advisers.
Buy-to-let watch episode 8 | It’s good to see some innovation to help affordability
The rising interest rates have added an extra layer of complexity to the affordability equation, making it more challenging for both advisers and borrowers alike. Affordability, a key factor in the BTL sector, becomes a moving target as rates fluctuate, requiring advisers to adapt quickly to changing circumstances.
Specialist lenders, in particular, are feeling the brunt of this volatility, struggling to establish stable pricing strategies amidst the uncertain swap markets. The intricacies of these markets, coupled with external economic factors, contribute to the complexity of pricing models, making it a formidable task for lenders to strike a balance between competitiveness and risk management.
Consequently, the increased workload for BTL advisers is not solely confined to the complexities of market research; it extends to navigating the intricacies of swiftly changing lending landscapes. Adaptability and resilience are paramount, as advisers must constantly reassess and adjust their strategies in response to market dynamics.
The buy-to-let sector is undergoing a challenging period fueled by escalating mortgage interest rates. The intricate interplay between these rates and the volatility in swap markets has burdened specialist lenders and BTL advisers. Navigating this complex landscape requires a delicate balance between adaptability, market awareness, and a keen understanding of the ever-changing dynamics within the mortgage industry.
Buy-to-let watch episode 8 | Advisers urged to expedite applications, but risks loom
The speed at which rates are pulled means advisers must submit applications quickly, which can result in mistakes. Some lenders cannot offer flexibility over errors and request the re-submission of the application, resulting in the rate being lost. The urgency to meet tight deadlines heightens the potential for oversight, underscoring the importance of a meticulous and expedited application process.
This challenging landscape necessitates advisers to tread carefully, balancing speed with precision to avoid the pitfalls of lost opportunities.
Buy-to-let watch episode 8 | Settled down
As of the current moment, it appears that the market has stabilised, witnessing adjustments in interest rates as lenders adapt to new pricing models and a notable increase in stability in swap rates. However, despite these developments, the persisting challenge of affordability looms large.
The landscape shifted significantly in 2016 with the Prudential Regulation Authority’s (PRA) introduction of Buy-to-Let (BTL) affordability rules. Notably, five-year fixed-rate mortgages gained popularity, meeting the PRA’s affordability requirements based on rates rising to 5.5%. It’s worth noting that the rules permit fixed rates extending beyond five years to be exempt from the stipulated 5.5% requirement.
For clients navigating the current environment, a potential strategy involves exploring the limited company route to secure a 125% margin, particularly in the case of a new purchase.
However, with the surge in interest rates, the landscape of five-year fixed-rate mortgages has shifted, with most now surpassing the 5.5% benchmark. In the residential market, discounted rates have gained favour due to their initial cost-effectiveness. In contrast, this trend exacerbates affordability challenges in the BTL market, given that many lenders now employ a notional rate significantly higher than the PRA’s specified figure—some going as far as 8.5%.
This heightened notional rate has implications for new purchasers, reducing the loan-to-value ratios they can attain. Additionally, it has impacted investors who, having secured financing through a bridge loan a few months ago, now grapple with the challenge of raising sufficient funds to repay the outstanding loan. Navigating these intricacies is crucial for all stakeholders in the market as they seek stability and sustainable solutions in the ever-evolving financial landscape.
Buy-to-let watch episode 8 | Mortgage prisoner
Recently, real estate investors successfully secured five-year fixed-rate mortgages below 4%, with rental affordability being calculated based on this sub-4% rate. As these properties approach their remortgage dates in the coming months and years, there is a notable risk of an increase in Buy-to-Let (BTL) mortgage prisoners.
In response to this challenge, many lenders now provide options such as top-slicing, allowing surplus rent or surplus earned income to contribute to affordability assessments. This development offers a positive outlook for investors, potentially mitigating the impact of rising rates that they might otherwise face.
Furthermore, the introduction of retention rates by various lenders, including specialized ones, is a welcome trend. This approach empowers investors to retain favourable rates, providing a degree of control over potential rate hikes.
Professional property investors often leverage rate review dates as opportunities to raise capital for further property investments. With the government’s proposed legislation mandating landlords attain an energy performance certificate rating of C or above for all properties, the demand for capital to fund property renovations may significantly surge.
Given these evolving dynamics, financial advisers should invest time in comprehending potential solutions. This involves exploring the nuanced criteria variances among lenders and staying informed about innovative products that could present viable alternatives for investors.
By doing so, advisers can better guide their clients through the complexities of the changing mortgage landscape and help them make informed decisions tailored to their unique situations.
Buy-to-let watch episode 8 |The higher notional rate affects new purchasers by lowering the loan-to-value they can achieve
Buy-to-let watch episode 8: When prospective homebuyers encounter a higher notional rate, their ability to attain a favourable loan-to-value ratio is adversely affected. This can have significant implications for those reaching the end of their mortgage rate term, especially if their lender fails to provide a suitable retention rate. In such cases, it becomes crucial to consider the Prudential Regulation Authority’s (PRA) like-for-like rules.
These rules allow lenders to select the rate for assessing a like-for-like remortgage. Consequently, there exists a divergence among lenders in terms of the reference rate used and the calculation methods applied.
For instance, Coventry adopts a reference rate of 6.5%, while TMW, catering to limited companies, utilises a five-year pay rate plus 0.5%, featuring rates starting from 5.49%. Quantum has entirely waived its interest coverage ratio requirement for like-for-like remortgages with a 24-month payment history.
Precise has introduced a limited-edition five-year fix at 5.44% in the realm of mortgage innovation aimed at enhancing affordability. This innovative approach involves applying a more substantial
fee (4%), enabling the establishment of a lower rate for affordability assessments.
This innovative strategy provides potential homebuyers with additional options to navigate the challenges posed by higher notional rates and contributes to the diversification of mortgage products in the market.
We reached the end of our publication on “Buy-to-Let Watch Episode 8 | Why Lenders Are Jubilant In Their Efforts”; until next time, stay Connect!