12 minute read
Buy-to-let review
Supporting landlord clients
Steve Cox
chief commercial officer, Fleet Mortgages
Buy-to-let and the private rented sector (PRS) will have a serious number of issues to confront in 2023, the most pressing being how to support and help landlord clients who are either looking to refinance or who might have been seeking to add to portfolios.
I’m conscious that I’m writing this many weeks before publication date, and there may have been some further movement in the market regarding rates, product availability, and transaction levels; however, as many have pointed out, it seems unlikely that we will get back to something like ‘normal’ in a short period of time, and therefore the challenges that exist today will continue to face us for some time to come.
But there has been some good news in recent weeks with a degree of political stability adding to the certainty the markets crave. Swap rates have come off the nosebleed highs we saw, and it is to be hoped this trend will transfer to providing lenders with the certainty they need to be able to price mortgages effectively and to return to market across all product sectors.
As advisers won’t need me to point out, for example, the provision of fixedrate buy-to-let mortgages has been hit – particularly when it comes to two-year deals, but also right across the board.
That certainly doesn’t help advisers and their landlord clients; however, one hopes there are currently enough product options available to them, even if these are shorter-term deals that allow them to secure finance for the moment and perhaps in six months look again into what will hopefully be a market with far more options.
We at Fleet have been offering a range of both tracker and green tracker products that we hope will allow advisers and landlords to secure competitively priced mortgages and that come with only a six-month early repayment charges (ERC) period, meaning they can review in mid-2023.
However, I also think we need to think much more in the medium-tolong-term about what the current financial situation will mean for landlords and their ability to keep providing the supply the PRS needs. Indeed, I’m not sure this increase in mortgage pricing could have happened at a worse time for the PRS,
given the reliance so many people have on it for their living arrangements.
If things continue as is, then supply will remain subdued, to say the least, because landlords – particularly those with only one or two properties – may increasingly realise they can’t cover both the extra costs of their finance and the extra costs that come with running a private rental property, full stop.
There has been significant anecdotal evidence that some landlords have already reached that point, and the only option they have is to sell. Ordinarily, a lot of those properties up for sale would be bought by other landlords, and the property would go back into the PRS mix. However, as advisers will know, the deposit/yield requirements to make a new purchase profitable have gone up significantly, which means landlords who might want to buy may not be able to.
Overall, it means supply continues to fall, plus for existing landlords as their finance costs go up, they are going to need to find higher yield in order to keep those properties they do have. Yield has always been important; however, in a much-changed interest-rate environment, it’s going to be even more vital in order to match the increased cost of mortgage payments with suitable rental coverage to deliver ongoing profitability.
That has repercussions for tenants. Landlords will cherry-pick tenants far more than they have previously done. The overwhelming demand for PRS properties will allow them to do this, meaning rents are likely to go up to levels where they can only be met by tenants with a good deal of money.
Supply constraints – an issue we have been trying to highlight for many years as various governments insisted on disincentivising property investment by landlords – are already hitting home. The PRS will become an investment only for the richest landlords and will be available only to the richest tenants if we do not find the ways and means to get more landlords active and to allow those who are already in this sector to keep their properties and add to them.
The cuts to stamp duty would be a good incentive were they available at any other time and not when mortgage costs have gone up. At the moment we are waiting for those costs to fall, and hoping the powers that be recognise that the PRS needs more supply, not less – and that without landlords, the problem is going to get a lot worse.
If we thought 2022 was a topsyturvy year, then when it comes to 2023 we probably haven’t seen anything yet. We need full and frank recognition that the provision of UK housing means more, not fewer, landlords are required. We also need policies that incentivise rather than punish. Without them, the PRS will increasingly be for the few, not the many. M I
Exploring BTL opportunities
Cat Armstrong
mortgage club director, Dynamo for Intermediaries
Professional portfolio landlords are currently dominating the BTL market as the number of ‘amateur’ or ‘accidental’ landlords continues to dwindle slowly due to tax and regulatory changes, rising interest rates, and additional required levels of expenditure.
More recent economic events have placed individual property investments under even greater scrutiny, in terms of immediate returns and more medium-tolonger-term aims. There is also the hassle factor for landlords to take into account, which can often be misinterpreted or underappreciated.
Over the years, landlords have built portfolios in a variety of ways in different times and under contrasting market conditions. Many professional landlords may have started as accidental ones, but came to appreciate the potential of the BTL sector. Others may have entered this arena with a more structured and scalable plan – and then there are those who have the ability to acquire whole portfolios in one fell swoop.
For those landlords who are fully invested in their portfolios and the BTL sector, opportunities for growth and additional investment options will continue to emerge. But at which end of the landlord spectrum will these fall, or, more pertinently, which landlord type is likely to maximise them?
A webinar poll undertaken by Countrywide Surveying Services (CSS) highlighted that 66 per cent of property professionals expect growth and opportunities across the buy-to-let sector to be experienced by landlords/property investors with a portfolio of 10+ properties. Twenty-two per cent opted for those with four to 10 properties, and 12 per cent selected those with one to three properties as the most likely to experience growth/maximise opportunities in the near future.
A further poll taken during the webinar found that only five per cent were “very pessimistic” when it came to confidence levels around the buy-to-let sector for 2023. Fortyone per cent said they were “very or somewhat confident,” 29 per cent indicated that they were “neither confident nor pessimistic,” and 25 per cent suggested that they were “slightly pessimistic.”
In addition, 45 per cent of respondents suggested that the greatest challenge currently facing the buy-to-let sector is rising interest rates. This was followed by cost-of-living increases and EPC regulations, with both recording 18 per cent, and then by greater regulation (13 per cent) and escalating taxation (six per cent).
This emphasis on professional landlords has also been evident in the swathe of limited companies being set up, and an increasing number of lenders are tailoring their BTL offerings to take this growth into account. The main advantages obviously stem from a tax perspective, and this shift is evident in recent figures released by Hamptons suggesting that the total number of companies set up to hold buy-to-let property has doubled since 2017. This is thought to represent over 300,000 landlords as incorporation becomes mainstream among property investors. Over the 12 months to September 2022, a total of 50,445 new companies were set up to hold buy-to-let property – the second-highest figure in any 12-month period.
Estimates by Hamptons researchers suggested that about 40 per cent of all new buy-to-let purchases are now made via a company structure. This is a record figure and one that is up from around 10 per cent in 2016, before the Section 24 tax changes were tapered in. It also predicts that more buy-tolet companies will have been set up in 2022 than in any previous year, despite fewer buy-to-let homes being bought this year compared to last year.
As demand for privately rented homes has climbed consistently since the pandemic, it’s little wonder that landlords who are committed to the BTL sector are constantly evaluating ways in which to be more tax-efficient, reduce outgoings, and maximise yields where possible.
Focusing on demand, research conducted on behalf of Paragon Bank found that, for the second time this year, the proportion of landlords reporting increasing tenant demand hit an all-time high. This revealed that a net increase in tenant demand during the past three months was seen by 65 per cent of respondents. This surpassed the previous all-time high of 62 per cent recorded during the first quarter of this year, marking a consistent and significant rise in tenant demand since a low net increase of 14 per cent was recorded in Q2 2020.
Breaking down the net increase also shows that the 39 per cent of landlords who reported that demand had “increased significantly” was the highest proportion since the metric was first tracked in 2011. Additionally, only one per cent of landlords felt that tenant demand had “decreased slightly,” while none said it had “decreased significantly.”
On the back of such a turbulent period, it’s difficult to second-guess any market performance in the early part of 2023. However, it’s inevitable that portfolio landlords and limited company lending will continue to play a key role, and this is a factor of which all advisers should be aware. M I
Challenging times
Jane Simpson
MD, TMBC
We have seen lots in the news about the negative impact of the challenging economic ewnvironment on borrowers. With many of us taking on mortgages to buy our own homes, the worry caused by rising rates is something we can relate to.
That said, I think we should also spare a thought for the people who have also been affected from a professional point of view.
Speaking to brokers, I know that many are concerned by the feeling that business has almost ground to a halt. With rates expected to continue to rise and squeezed households struggling to save for deposits, there is an expectation that things will get worse before they get better as more would-be borrowers are either priced out of the market or choose to sit tight, awaiting a better time to buy.
Sadly, for some, all of this is starting to have a noticeable effect on mental health, and I can see why. While there will be some advisers who will remember a time before the global financial crisis (GFC), for many, the current conditions are like nothing they have ever experienced. Even someone with years of experience may have only ever worked in the financial services sector during a time of relative economic stability.
This is because the tighter regulation introduced in the wake of the GFC has significantly shaped the market. Minimum underwriting standards for lenders, introduced by the Prudential Regulation Authority, have meant that borrowers are subject to more stringent assessment, while the concept of loan-to-value pricing, not seen before that time, helped to ensure that borrowers would not be too highly geared in a bid to mitigate the risk of negative equity in the event of a market downturn.
Along with relatively few crises to disrupt the global and domestic economy, such bolstered regulation contributed to a period of fiscal stability, and borrowers have enjoyed low interest rates for some years. As a result, a large proportion of borrowers were able to lock in to a fixed-rate mortgage, paying interest at a rate they could easily afford with the certainty provided by static repayments. The five-year fixed-rate mortgage has dominated the market, with a handful of two-year fixes sold in situations where the rent calculation worked and the borrower didn’t want to commit to the longer term.
With rates so low and stable, there had been little to differentiate products – with money so cheap, the 10 or so basis points separating two competing products made little difference to borrowers, as they could comfortably afford repayments on both.
Before this time, when rates were higher, borrowers would often adopt different strategies in order to get the best deal for their circumstances. Lenders offered a range of different options to cater to this, so brokers were more accustomed to offering advice on a broader mix of products.
An obvious example is the tracker mortgage, because, while they have accounted for a small proportion of business in recent years, they were once more common and have started to re-emerge as one of the few viable options for some clients.
Often easier for lenders to fund, tracker products will likely have a more competitive headline rate compared to the fixed-rate options available, increasing the chance of the rental calculations working in the landlord’s favour.
Whilst opting for a tracker in a rising rate environment can be deemed a risky move, the greater flexibility, particularly on products with no ERCs, can be a real positive while clients keep a close eye on the market.
The rate differential at the start of the contract can be significant, so landlords may wonder whether rates will rise to a level where their tracker becomes more expensive than the fixes currently available to them. Of course, even if they do, the borrower would have already benefited from months of lower payments.
In addition to this, it is anticipated that following a peak next year, rates will start to fall, so those on trackers could benefit here instead of being stuck on a high fixed rate for a number of years.
So we can see that, despite the prominence of fixed-rate mortgages in recent years, the best option is often influenced by current market conditions.
Advising on these types of products will represent a significant shift in the way that some brokers work, but by becoming well-versed in the different options that are increasingly seen in today’s market, they can offer valuable advice to clients and hopefully continue to place plenty of business. M I
