The buy-to-sector (BTL) has had quite the rollercoaster ride over the years. In more recent times, we have experienced a significant amount of volatility across the money markets which continues to impact pricing across the whole mortgage market.
Staying with BTL, this volatility has placed an increased emphasis on headline rates, terms, criteria and stress testing for landlords and also on the value attached to the advice process.
But for the purpose of this piece, I’d like to focus on mortgage terms by evaluating their performance over the years, the influencing factors impacting this performance and where we are now.
Taking a step back in time for a moment, throughout the mortgage market, the 2-year fixed rate product largely reigned supreme.
This is also true in the buy-to-let marketplace as landlords took advantage of cheaper, shorter-term products as competition in this area was largely unrelenting for long periods.
Back in 2016 – some 20 years after the launch of the BTL mortgage in the UK market – 2-year fixed deals accounted for just under 68.5% of market share, while 5-year deals sat at just over 23%.
However, following the introduction of stricter lending criteria on shorter fixed-term buy-to-let mortgage deals by the Prudential Regulation Authority (PRA), landlords found it far more difficult to access such product types.
By Q1 2017, 5-year deals were suggested to account for just under 50% of market share, rising to 56% in the second quarter of the year. Around this time, landlords took the opportunity to review existing portfolios and make further investments ahead of a potential Bank of England base rate rise. By Q3 2017, the market share for 5-year fixed deals increased to over 61% then rose further to 66% in Q4 following the Bank’s base rate rise of 0.25% in November of that year.
This was according to data from Commercial Trust Limited at that time which went on to cite an almost complete role reversal by Q1 2018, when 5-year deals were reported to account for just under 67% of market share compared to 28% for 2-year fixed rate products. Inevitably, the next few years continued to see the 5-year fix fast become the go-to option for landlords as they benefited from some historically low rates.
Let’s fast forward past the well-documented events of Q3/Q4 2022 to March 2023 and data from Moneyfacts saw a total number of 2,400 buy-to-let mortgages on the market, meaning choice has returned to a level not seen since August 2022. It also added that, at this time, there were more 5-year fixes on the market than 2 year-fixes with 914 5-year options compared to 632 2-year products.
A few months down the line from this and, with rental incomes increasing, might we see a shift away from the 5-year fix back to a 2-year fix?
The reality is that most landlords would prefer a shorter-term option when rates are high for a number of reasons.
However, such an option has not fit with affordability calculations for many properties in recent times, which further heightened the appeal of the 5-year fixed as a viable option. That’s not to say a 5-year fix will not remain a good option for those landlords who are looking for greater control over their more medium-term costs and in securing their outgoings.
However, with rents rising, some lenders are reducing their stress rates and deals are starting to fit on the shorter product terms, especially in higher yielding areas outside of London.
To further support those landlords looking for shorter term products, here at Foundation Home Loans, we have chosen to improve our ICR stress test for shorter term rates, simplifying it to either a pay rate plus 2% or a fixed 8%, whichever is the higher. Our stress test on 5-year products is unchanged – calculated at pay rate.
Utilising the new stress test calculation should open up new maximum loans for a number of borrowers wanting shorter term products and from the feedback we’re seeing from our intermediary partners, this is likely to result in demand for the two-year fix coming back strong over the second half of 2023.
Grant Hendry is director of sales at Foundation Home Loans
