Nick Sheppard, managing director of Framework Mortgaging, shares his insights on the mortgage market and key things for buy-to-let investors to consider heading into 2024.
This year has been challenging for all involved in the mortgage market. Unique economic factors have resulted in a volatile economy which has led to increased inflation, Bank of England base rates and the cost of funds for lenders.
The economic uncertainty has directly impacted your mortgage rates. Lenders have struggled to keep pace with the market and price mortgages accordingly. This has led to ever-changing rates and increased anxieties with clients. The result? Products have been released and withdrawn from the market in a flash.
In this uncertain environment, there’s one certainty to be taken away - an operational mindset and risk mitigation strategy will help you prepare for your long-term investment plans. Especially BTL investments that’ll benefit from focused goals, periodic reviews and diversification. BTL should be monitored just like you would a pension.
With that said, there are 3 main areas of cash flow risk when investing in BTL:
Void periods. Tenant attrition and the associated lettings finders fees.
It hasn't been unusual to see clients fall victim to all these risks. (It’s easy to do). Diversifying your property type and tenant profile will protect your portfolio, not the property, against increased cash flow risks. So, with a considered portfolio, high-interest rates may not be a disaster.
Now, the question remains: what’s going to happen in the next 12 months?
Next year will be an interesting time economically. Inflation has reduced and lenders are growing in confidence with how to price their mortgage products. The challenge for lenders is keeping rates as low as they can. This is to allow clients to reach 75% borrowing, an issue that’ll impact re-mortgaging.
When investing in BTL, in most cases, your rental income is your affordability. You need to pass a rental stress test which demonstrates to the lender your rental income will carry you through any rate fluctuations. The calculation changes per mortgage product but the base of the calculation is the mortgage rate on offer. In other words, the lower the rate, the more you can borrow.
Again, this is going to be a challenge in the context of re-mortgaging. Specifically with re-mortgaging clients away from a low-rate product onto a new high-rate product.
At the time of writing, lender funding lines can cost up to 5% to lend you the money. This is a challenge for lenders as they need to cover costs. Yet to keep BTL worthwhile, we need rates to be under 6%.
Thankfully, we’re seeing competitive rates but in return we’re seeing higher than usual product fees. These high product fees are a way for lenders to cover their costs without raising interest rates. In most cases, increased interest rates will result in minimal cash flow and make the investment too much of a risk to take on.
For the reasons mentioned above, lenders are getting bad press. But they’re aware of the risks to clients and they know cash flow is a concern. They’re looking for solutions and there are steps you can take to address these challenges too.
Proactivity is always key with mortgaging. It's important clients maintain their credit profiles, engage with the fact-find process and discuss your strategy and financing options with a specialist broker.
Your current rental stress tests are also important. If you own a property, do you know how much you can borrow when you refinance? If not, you may need some time to help resolve any failing rental stress tests.
As always, it's important to focus on your long-term goals and take this opportunity to revisit why you’re investing.
There are solutions out there for many mortgage hurdles and a different approach may provide solutions you weren’t aware of. It’s having the self-awareness to explore options you haven’t considered and talking about them with a qualified broker.
There’s less volatility in the mortgage market and lenders are growing in confidence with how to price their mortgage products.
Product fees are a short-term concern so when advising, it's important we focus on the true overall costs over the long term.
We’ve seen inflation decrease and investors are still looking to invest and capitalise on competitive property prices.
Overall, we’re settling into a new normal with client expectations on the market aligning with a more realistic economic outlook. There’s the expectation of rates settling part ways through the new year. So, for your 2024 mortgage outlook, balancing optimism with pragmatism is essential.
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