Buy to Let Affordability
Rising mortgage interest rates have impacted the entire market, and buy-to-let mortgages are no exception. The buy-to-let sector includes many specialist lenders offering products with complex criteria to assist property investors. Nevertheless, these lenders have struggled the most with pricing due to ongoing volatility in swap markets.
Challenges Faced by Buy-to-Let Advisers
This volatility has created significant challenges for advisers, including rapid rate withdrawals and sudden increases impacting affordability. Additionally, advisers face increased workloads as they research the market multiple times for each case. Lenders are also experiencing delays due to internal challenges, slowing down their services.
The quick pace at which rates are withdrawn forces advisers to submit applications swiftly, leaving less time for preparation. Consequently, errors may occur, leading to lenders rejecting applications and requiring re-submissions. This process often results in lost rates, further complicating matters.
Market Stabilisation and Future Challenges
While the market appears to have stabilised slightly, with some lenders reducing rates, affordability concerns remain. The buy-to-let sector has faced affordability challenges since 2016, when the PRA introduced stricter rules. These rules required affordability calculations based on rates rising to 5.5%.
However, five years or more fixed rates were exempt from the 5.5% projection requirement. Rising interest rates mean most current 5-year fixed rates exceed this threshold. Consequently, affordability calculations have become even more challenging for investors.
Discount Rates and Higher Notional Figures
Discount rates are gaining popularity in the residential market due to lower initial costs. However, buy-to-let exacerbates affordability issues. Many lenders now use notional rates as high as 8.5%, significantly above the PRA figure.
Higher notional rates reduce achievable loan-to-value ratios for new purchases. Existing investors also face difficulties refinancing properties bought recently with bridging loans. Many investors secured sub-4% rates in the past, but those same properties may require refinancing soon at much higher rates.
Potential Rise in Buy-to-Let Mortgage Prisoners
Looking ahead, there is a growing concern about buy-to-let mortgage prisoners. Investors who previously secured low rates may struggle to remortgage at higher rates. This challenge could leave many unable to raise sufficient funds to repay outstanding loans, further tightening market conditions.
Challenges in the UK Mortgage Market
The speed at which rates are pulled requires advisers to submit applications quickly. This often leads to reduced preparation time, increasing the risk of errors. Unfortunately, lenders frequently refuse flexibility over mistakes, demanding re-submissions. Consequently, this results in the loss of the initially secured rate.
Although the market may shift again, recent observations indicate some stability. Notably, we have seen slight rate reductions as lenders adapt to pricing models and swap rate consistency. However, the buy-to-let affordability challenge remains an ongoing concern. Since the PRA introduced affordability rules in 2016, 5-year fixed rates have grown in popularity. These rules mandate affordability testing based on a 5.5% rate projection.
Nevertheless, fixed rates of five years or more can bypass the 5.5% requirement. With recent interest rate rises, most 5-year fixed rates now exceed the 5.5% notional threshold. This change creates further affordability challenges for buyers and investors.
Buy-to-Let Affordability Issues
Discounted rates have become increasingly common in the residential market due to their lower initial costs. In contrast, these rates create affordability barriers in the buy-to-let sector. Most lenders now assess affordability using higher notional rates, some as high as 8.5%.
Higher notional rates impact new buyers by reducing achievable loan-to-value (LTV) ratios. Investors who purchase properties with bridging loans face added challenges. They now struggle to raise sufficient funds to repay outstanding loans.
Just a few months ago, investors secured 5-year fixed rates below 4%, with affordability calculations based on that rate. These same properties will require refinancing soon, posing potential issues. Consequently, there is a growing risk of buy-to-let mortgage prisoners in the near future.
Advisers and investors must remain vigilant as the market evolves. Keeping updated with lender criteria and affordability rules is critical to securing the best possible deals. Exploring alternative financing options may also help mitigate potential risks in this changing landscape.
Looking at rates
It is good to see more and more lenders offering retention rates, including some of the specialist lenders, as this may help investors control the rate increase they would otherwise have to suffer. We often see professional property investors using a rate review date as an opportunity to raise capital to enable them to invest in other properties or do work for their properties. Should the parliament bill require landlords to bring all properties to an EPC rating of C or above to continue as planned, raising capital for property renovations may be even more in demand?
Buy-to-let advisers will become increasingly in demand as property investors seek solutions to help them continue their plans. It is worth advisers investing time in understanding potential solutions available in the market. Solutions can simply be exploiting the criteria differences between lenders or keeping abreast of some of the new innovative products launched by lenders.
If a client comes to the end of their current rate and the existing lender does not offer a suitable retention rate, it is worth remembering the PRA like-for-like rules. These rules allow lenders to choose the rate used to assess a like-for-like remortgage, so there is a variance between lenders and their calculation rate. For example, Coventry will use a reference rate of 6.5%, and TMW for Ltd companies will use a 5-year pay rate plus 0.5% with rates from 5.49%.
Waived ICR
Quantum has waived its ICR requirement completely for like-for-like remortgages with a 24-month payment history. It’s good to see some innovation in the market to help affordability. Lenders like Precise have recently launched a limited edition fixed 5-year fixed rate at 5.44%. By applying a more significant fee (4%), they can set a lower rate, which will be used for affordability, making the product
more accessible.
Another area of criteria to look at is the margins used by lenders in their calculations. Most lenders use 125% for limited companies and basic-rate taxpayers. For higher-rate taxpayers buying in their own name, the rate often used is 145%, but as the lenders do not have to follow a specific PRA rule for this part of the calculation, it can vary. Lenders like Harpenden use 135%, and Clydesdale and Mercantile use 125%. Your client could consider the limited company route to secure the 125% margin if it is a new purchase.
Top slicing
Many lenders now offer top-slicing, and we may see more of this moving forward. Top-slicing is where either surplus rent or surplus earned income is used towards affordability. With lenders like Aldermore, this reduces the margin to 110%, and Virgin will allow income to be used to cover shortfalls above 100% for non-portfolio landlords. If you are still struggling to assist your client, you may wish to direct them to consider whether the property lends itself to being a holiday let or HMO. Both have potentially higher rental incomes.
Alternative calculation options are then available. For example, HTB will use the actual expected income based on market data for a holiday let to meet affordability. If HMOs do not need a licence, Fleet will offer the standard mortgage range with lower rates and calculations.
The buy-to-let affordability challenge will remain as we settle into the new rate environment. However, having spoken to some of the lenders, the appetite to lend is still strong, and I am really interested to see some of the lender’s planned innovative products launch into the market in the coming months.
Thank you for reading our publication, “Buy to Lets Affordability | Challenges and Opportunities.” Stay “Connect“-ed for more updates soon!
