November 2022 started in relatively gloomy fashion, not least because of the downturn in the weather after a prolonged summer.
The Bank of England Monetary Policy Committee voted to increase the base rate from 2.25% to 3% on 3 November – the biggest rise since the late eighties – and the headlines are full of how this will affect homeowners across all levels of the market.
It is not just those looking to purchase properties as owner-occupiers that face difficulties, however. Landlords now face rising rates on their buy-to-let (BTL) mortgages or remortgages, which will likely have a knock-on effect on rent prices, at a time when finances are already tight.
Beyond just tightening the margins on existing properties, rising rates and a reduction in product numbers as lenders attempt to insulate themselves against the current storm, means it is going to be increasingly difficult for those BTL investors looking not just to survive, but expand.
There is also stress testing to consider. In the face of future uncertainty, many lenders are asking landlords to meet much higher testing standards before they will release much-needed funds.
Opportunities missed
All of this makes for a difficult period for landlords, many of whom have reportedly discussed selling up in order to avoid the complexity and challenges of the current market. However, this could also mean vast missed opportunities for those investors who remain committed to the market.
The strong fundamentals of BTL have not changed. The UK private rental market is, as ever, experiencing strong demand and not enough supply – a dynamic that has for a long time made this a lucrative area for investment for those willing to put in the work – and this dynamic looks only set to continue into the future.
Previously, landlords looking to free up capital from existing properties in order to add to their portfolio have often relied on remortgaging. At the moment, however, due to the combined concerns of higher rates and tightening criteria, this might no longer be a viable option as property investors may now find that they cannot borrow anywhere near what they wanted to through traditional methods of capital raising.
Bridging for BTL
Rather than allowing these opportunities to pass by, however, BTL landlords looking to expand could consider turning to the specialist, short-term market.
Bridging lending does not rely on the same approach to stress testing as BTL term mortgages as the exit is the key consideration. This exit needs to be scrutinized if it relies on a BTL mortgage in the future, of course, but there are circumstances where investors can put themselves in a stronger position to secure a BTL mortgage by using bridging to increase the rental and capital value of a property.
For example, a bridging loan might be used in order to purchase a property in need of refurbishment, either to bring it up to a better standard of living, or perhaps to split it into multiple flats, diversifying the future income stream. This means that at the end of the bridge, the landlord could be in a much better position to present themselves as a lending prospect, able to show that they have added rental and capital value, in order to help temper criteria and stress testing issues.
And where landlords might not have sufficient equity in one property to raise sufficient funds for an onward purchase and renovations, there are lenders like Castle Trust Bank that can enable them to structure a loan secured against multiple properties in a portfolio.
Every investor will have a unique approach to their investment and every purchase is different, particularly within such a complex financial environment. This is why it is important to work with a seasoned lender, with experience in both short and long-term BTL finance. Here at Castle Trust, we understand that weathering the storm does not mean forsaking progress and growth, and we are able to use our experience of this market to find the right ways to move forward.
Barry Searle is managing director of property at Castle Trust Bank
