What help is out there for BTL investors and landlords?

The increases to the stress tests may mean landlords have more limited lender options going forward because the rent no longer covers the mortgage loan. 

Karen Noye, a mortgage expert at Quilter, says some landlords may find that their only option is a product transfer with their existing lender unless they are in a position to pay some of the mortgage off.

Determining rates

So what type of BTL investor/landlord suits a variable or fixed rate? 

At Just Mortgage Brokers, director Carl Shave says more than 85 per cent of their BTL clients are recommended and opt for a fixed rate for stability of rent reviews,

He says in determining which type of mortgage suits the BTL investor or landlord, the type of product is very much linked to circumstances rather than perhaps the individual.  

Circumstances can relate to the investors plans and that of the interest rate outlook.  

Noye says landlords wanting to remortgage away from their existing lenders may have to consider longer-term fixed rate products to meet the lenders’ stress tests for their current mortgages, meaning they will be locking themselves into a product with penalties when rates are higher than previously experienced. 

Alternatively, she adds: “They may wish to consider going onto their lender’s variable rate to have more flexibility and to give them time to see how the mortgage markets go, though this might result in too much of an increase for some to bear.”

There are lenders that are offering client lifetime trackers and two-year trackers with no early repayment charges, allowing for flexibility to switch to a more competitive fixed rate when the opportunity arises in the future.

With rates as high as they are most landlords should think about tracker rate mortgages when their current deals end.Luke Thompson, PAB Wealth

Also, some lenders can do 100 per cent debt service coverage ration (DSCR), rather than stressing at 140 per cent (higher rate taxpayers) or 125 per cent (for limited company or basic rate taxpayers). These lenders are offering product purely working on pay rate, explains Nicholas Mendes, mortgage technical manager at John Charcol.

DCSR is a key measure of a company's ability to repay its loans.

Mendes adds: “The privilege to choose between a fixed or variable rate product may be out of their hands for some landlords as lenders tend to stress over a five-year fixed more favourably. 

“Landlords as a result will be at the mercy of their existing lender and what product transfer rates are on offer.”

Luke Thompson, a financial adviser at PAB Wealth, says: “I think with rates as high as they are most landlords should think about tracker rate mortgages when their current deals end. 

“With potential falls in interest rates in the future, the flexibility of a tracker rate mortgage would enable them to move to a fixed rate mortgage with no early repayment charges in the future if the rates do drop.”

Some landlord borrowers may be thinking about opting for a variable/discount/tracker rate right now over a shorter time period as they wait to see how fixed-rates might move over the course of the next six to 12 months. 

We believe that affordability begins to work ‘normally’ again when rates are around the 5 per cent mark.Steve Cox, Fleet Mortgages

And although swap rates did fall off their Autumn 2023 highs, in recent weeks they have begun to creep back up. 

That is important for product pricing, says Steve Cox, chief commercial officer at Fleet Mortgages, particularly in BTL where the capital markets fund many lenders. 

Even though Fleet is not funded in this manner, Cox explains the lender still has to respond to competitors and what is happening in the wider market. 

He adds: “We believe that affordability begins to work ‘normally’ again when rates are around the 5 per cent mark, and we have inched closer to that mark, so we will have to see where rates move next.

“Also, something to point out is that seven and 10-year money is cheaper than two and five-year at the moment, which means landlord borrowers might want to opt for longer fixes in order to take advantage of the cheaper pricing.”

Protection and responsibilities

With many landlords facing challenges this year, BTL insurance, often known as landlord insurance, has grown in popularity over the years.

There are different levels of cover available including owner’s liability and loss of rent cover if the property was uninhabitable. 

There are a variety of rent guarantee insurance policies available on the market that could help to cover the risk of non-payment of rent.

Riz Malik, director at R3 Mortgages, says wherever possible landlords should ensure they have the capacity to deal with rental voids or non-payment of rent in the current market. 

Many landlords focus on the yield. That is certainly a key aspect but a landlord has a legal obligation to a tenant.Carl Shave, Just Mortgage Brokers

He adds: “Even if tenants are unable to pay their rent, the landlord is still obligated to meet their mortgage debt obligations. 

“Failure to service the mortgage may have an impact on their credit and, as a result, their ability to obtain future financing.”

Shave adds: “Many landlords focus on the yield. That is certainly a key aspect but a landlord has a legal obligation to a tenant and this is an area that I only see getting more onerous for the landlord as governments, quite rightly, look more into tenants rights.

Paul Fryers, managing director of Zephyr Homeloans, says protection products can play an important part in building a portfolio of properties backed with buy-to-let mortgages.

Fryers adds: "As a result, landlords working with their broker on the best course of action for their needs is the best route they can take. Landlords should always take into account the purchase price of the property, average rents in the area, running costs and the tax implications for their chosen BTL business model – all of which will help them determine the likely profit on the property."

As well as trying to gauge where rates are going, another change landlords need to be considering are the developments relating to energy performance certificate ratings, which measures and categorises how energy efficient a property is.

From 2025, all newly rented properties will be required to have an EPC rating of C or above. 

Currently, properties only require an EPC rating of ‘E’ or above. Existing tenancies will have until 2028 to comply with the new rule changes.

The pressure on lenders from the government is growing, so lenders will need to be looking to ensure that the homes they lend on are suitable. 

With most of the homes in the UK being an E or D rating, landlords will also have to consider any costs to improve potential properties.

Scott Taylor-Barr, a financial adviser at Carl Summers Financial Services, says: “The EPC of the property is key now for a landlord buying property.

“The changes that are here and the proposed changes make this the biggest issue facing the sector at the moment.”

Ima Jackson-Obot is deputy features editor at FTAdviser