2023 wasn’t exactly a highlight for those in the buy to let market with tighter regulations, spiralling interest rates and a high cost of living. The market’s still tough but how can lenders take some of the stress away for landlords?
The Buy to Let (BtL) market has been hard hit, with purchase activity down by 53% in 2023. However, let’s not forget the significant growth in the market over the previous three decades – the market is still substantial. It’s a resilient market that has been through many turbulent times and the outlook is slowly beginning to improve with the decline forecast to slow to a 13% contraction for 2024.
Demand for BtL properties is picking up. According to the Bank of England’s Credit Conditions survey, lenders have started to up their expectations for BtL mortgages, with data for the first half of 2024 looking fairly strong. The Building Society Association reported its 6th largest single quarter increase in investors looking for Buy to Let properties.
Demand is still there
There is still a demand for BtL property and lender expectations point to further increases in demand. It’s a good asset with long term growth and good rental income. With demand for housing still outstripping supply, there isn’t enough housing stock, and many renters are competing for homes in oversubscribed markets. This has alleviated some pressures on landlords with rents increasing by 6.2% in the last 12 months to January 2024.
Despite the rent increases, the sector is a lot less profitable as it was once due to the rising costs of being a landlord. In Q1 2018, the average interest cover ratio (the landlord’s mortgage costs covered by their rental income) was 342 per cent. In Q1 2024 it was 191 per cent, (UK Finance).
The challenges for BtL investors remain, particularly for smaller-scale landlords who are more likely to feel the pinch from higher interest rates and less able to spread costs across their portfolios. Recent market data indicates that larger landlords are likely to be buying up some of the properties sold by smaller landlords. The accidental landlord may fall by the wayside, but professional landlords are in there for the long game.
How can we help?
- Interest rates
Stress rates are a bone of contention for clients, brokers and lenders alike. When interest rates were low and house prices were high, there was a tendency for borrowers to max out how much they could borrow, and as interest rates started to increase, there was a need to increase stress rates to ensure mortgages would be affordable in the future and reduce the potential for arrears. High stress rates have made passing affordability tests harder for many. Over the last year, arrears for landlords are still remarkably low – UK Finance stated that in Q4 2023, just 0.68 per cent of all BtL mortgages were in arrears – lower than in the residential sector, as it has been for many years. With interest rates now stabilising and starting to fall, and swap rates becoming more favourable, we recently reduced our BtL mortgage rates and from mid-September, we’ll also be reducing our reversion rates by 0.25 per cent.
In addition, for the increasing number of portfolio landlords, we won’t stress background properties as long as they’re self-financing. We also don’t have a limit of the number of properties that can be held by a portfolio landlord. This could become a huge benefit for those snapping up the properties of accidental landlords exiting the market.
- Offset mortgages
An offset mortgage can also be worth considering, giving a great amount of flexibility to help landlords to increase their overall cashflow and ultimately increase their net profit. The main benefit of an offset mortgage, where savings are linked to a mortgage account, is either greater cash flow via reduced monthly payments or a shorter length of time that they’ve got the mortgage secured against the property as more of the payment goes to capital reduction rather than interest. Either way, those funds are put to better use than sitting in a low-rate current account, or a savings account where interest is potentially subject to income tax and, importantly, the funds are still available to use whenever needed.
- Income
We don’t have a minimum income for BtL. We’re also able to accept income from pension pots and investment portfolios (up to 90% split over the term of the mortgage), stocks, and shares ISAs, other ‘unearned’ or passive income streams such as rental income, state pension and any other annuities can be added to the assumed income.
- Age is no limit
At Family Building Society, we can lend to can lend to higher ages compared to many other lenders and our older borrowers are treated exactly the same as our younger ones. We accept applications from clients up to the age of 89 for Buy to Let with the same criteria and product range.
- Flexibility
Lastly, lenders like us, who manually underwrite can be hugely flexible. Many high street banks have been nervous, tightening lending criteria and often have a ‘computer says no’ approach. We offer a holistic, tailored approach and can make exceptions where lending makes sense. We have nine local BDMs who are dedicated to their own specific area. They can work closely with brokers to get a case placed with the underwriters, and can discuss cases before application, looking at potential options to improve affordability before the application is submitted. All resulting in a smoother process with a much more positive outcome for brokers and their clients.
Find out more:
To contact our Mortgage Desk or your local BDM,
CALL US ON: 01372 744155
OR EMAIL: mortgage.desk@familybsoc.co.uk
FAMILY BUILDING SOCIETY, EBBISHAM HOUSE, 30 CHURCH ST, EPSOM, SURREY KT17 4NL
Family Building Society is a trading name of National Counties Building Society which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. National Counties is on the Financial Services Register Firm Reference Number 206080.
