Lenders need to innovate to save BTL, brokers say

Lenders need to innovate to save BTL, brokers say

Mortgage brokers have expressed frustration over the lack of innovation among mortgage lenders in the buy-to-let space, with many in agreement that action is needed “before things get worse”.

Mortgage brokers have previously highlighted that buy-to-let investments are becoming untenable without large rent increases for new investors, with those coming off fixed-rates expected to see a significant jump in interest rates.

Brokers also expressed shock as lenders implemented stricter stress testing for buy-to-let investors in response to turbulence in the UK government bond market. 

Article continues after advert

R3 Mortgages director, Riz Malik said current rental calculations do not work unless you have a low geared or high-yielding property.

“You would struggle to finance a lot of buy-to-lets in the south as things currently stand,” Malik said. 

“Lenders will be forced to innovate or they face a quiet 2023. If I was a lender, I would be reaching out to brokers and setting up focus groups to explore ways to resuscitate the market.”

Others in the industry take the view that the lack of regulation around buy-to-let products is partly to blame for the current turmoil.

"The buy-to-let market has always been slow to innovate, it took many years before they offered a wide range of products for limited companies,” PFEP Wealth Management’s managing director, Richard Bishop said.

“The problem is they are not regulated by the Financial Conduct Authority, so the consumer duty will have no impact on the buy-to-let market." 

In Bishop’s view, this means that lenders have no incentive to innovate.

“If anything, the buy-to-let lenders will curtail lending. The rates are currently around 8 per cent for fixed limited company products, which compares to around 3.5 per cent 3 months ago,” he said.

Stress tests, which are applied to a mortgage borrower’s application to check their ability to repay, have also seen a huge increase, and have moved from around 4.5 per cent in September to 8 per cent now.

Scott Taylor-Barr, a financial adviser at Carl Summers Financial Services said many deals are struggling to pass this new higher test level.

“The overall issue with the buy-to-let space currently is the sharp increase in mortgage rates, with rents not yet increasing to account for that increase. 

“This means many deals struggle to pass the lender rental stress tests, especially if you are a higher rate tax payer and/or want less than a 5-year fixed rate deal, as both those scenarios are treated even more harshly within the stress test,” Taylor-Barr said.

Reducing these stress tests would help the sector, some brokers have argued.

Another issue brokers have highlighted is around support for landlords on long term tracker mortgages.

Mortgages For Actors founder, Austyn Johnson said: “There should also be support for those longer term landlords, who have been on trackers for maybe 20 years with long term clients who are paying a lower rent than the locality demands.  

“The landlords are happy as they have had the same tenants for the last 15-20 years, but the mortgage lenders will not be able to help them remortgage on to a fixed product due to this."