What impact did the 'mini' Budget have on the BTL market?

Because of the resulting chaos in financial markets, many lenders initially withdrew from the market due to the high level of uncertainty.

At the time, there were initial concerns that the rise in rates immediately following the "mini" Budget meant that the BTL market was doomed.

Karen Noye, a mortgage expert at Quilter, says after the "mini" Budget the mortgage market became incredibly turbulent, with lenders increasing rates on both residential and BTL mortgages rapidly with very little notice, and some even withdrawing temporarily from the lending market.

“Many landlords are on interest-only mortgages and therefore they started to worry about the affordability of their mortgage deals with interest rates set to skyrocket. Ultimately, these higher mortgage costs have resulted in a smaller profit margin for landlords,” Noye adds.

Luke Thompson, a financial adviser at PAB Wealth, says: “The 'mini' Budget effectively stopped most landlords from purchasing properties. Since the 'mini' Budget I have only had one new mortgage application for a BTL landlord. Rather than an average of two to three applications a month as a minimum prior to that."

Swap rates jumped dramatically after the "mini" Budget, which meant the cost of borrowing increased significantly and in certain product areas, notably two-year fixes, it became extremely difficult, even impossible, for lenders to price accurately.

This is why a large number of products were pulled from the market. 

The 'Truss premium'

Steve Cox, chief commercial officer at Fleet Mortgages, says landlords who needed to refinance at that time would have found a market very different to the one they had previously mortgaged in, with rates much higher. 

When lenders started returning to the market they took a very defensive stance, beginning with high rates that have since been reduced. 

They took a number of months to remove the 'Truss premium' on their pricing, by which time interest rates had been raised to account for soaring  inflation. 

As rates have risen, the biggest challenge remains borrower affordability, that is, meeting the rental stress-test affordability criteria of lenders when rates are higher, Cox says.

He adds: “It’s why you might have seen more lenders offering products with lower rates but higher fees, in order to help borrowers get the loans they require at the current affordability rates. 

The 'mini' Budget effectively stopped most landlords from purchasing properties.Luke Thompson, PAB Wealth

“We’ve also seen a greater number of tracker/discount products that provide options to landlord borrowers over the short-term if they feel that fixed rates will fall further in the future.”

Increased stress-rate testing has meant that landlords need high rental values to achieve the same loan amounts.

In any case, landlords are far worse off than they were at this time last year and the current environment for landlords is the bleakest in recent memory.

Landlords whose mortgage deals expired in September or later typically responded by raising the rent to compensate for the rising cost of borrowing.

BTL lenders have attempted to modify their products to allow landlords to borrow more against their properties as many face challenges refinancing.

This has taken the form of lower headline rates and stress tests while increasing arrangement fees.

Affordability tests

Lenders assess affordability for BTL mortgages by comparing gross rental incomes with interest payments via a measure called the interest coverage ratio or ICR.

As a result, if mortgage payments were to rise a landlord would have to raise the rent to be able to refinance on similar terms.

Banks require a minimum ICR of 125 per cent for limited companies and basic rate taxpayers, and 145 per cent for higher rate taxpayers.

Scott Taylor-Barr, a financial adviser at Carl Summers Financial Services, says: “The sharp increase in mortgage rates meant that the ICR calculations (a ratio between the mortgage payment and rent received) that lenders use to set loan size was heavily impacted, so getting mortgages of the amount needed became difficult, as mortgage rates had risen sharply but rents had not.

Over time, as the money markets have stabilised so has the outlook for the BTL market, somewhat.

Most have simply readdressed their expansion plans moving forward rather than reducing stock.Carl Shave, Just Mortgage Brokers

Nicholas Mendes, mortgage technical manager at John Charcol, says: “The good news is that following the government's reshuffle, with Rishi [Sunak] and [Jeremy] Hunt at the helm, markets have reacted well, resulting in swap rates coming down and lenders slowly reducing rates from the highs of September and October. 

“Coinciding with this timeline of rate reductions, we have also seen lenders come back onto the market and ease their lending restrictions.”

But although criteria have eased slightly, rates have not reduced as quickly as many landlords hoped, which has impacted mortgage ICRs.

Mendes says this has resulted in landlords not being able to raise funds to either remortgage on a like-for-like basis or raise anything at all as lenders introduced minimum income requirements as part of their criteria to make lending more stringent. 

Consequently, landlords are restricted to the lender’s SVR or at the mercy of their existing lender’s product transfer rates.

Carl Shave, director at Just Mortgage Brokers, says many landlords reviewing their rentals are saying that they have not been charging tenants true market value, so it was likely they would be applying an increase.  

There is now a far greater product choice available to landlord borrowers.Steve Cox, Fleet Mortgages

Shave adds: “Some have looked to offload some of their portfolios but, most have simply readdressed their expansion plans moving forward rather than reducing stock.  

“BTL mortgages are good business for lenders and while the market has taken a hit due to property sales and increased stress rates they continue to look at ways of ensuring BTL business can continue for them."

Cox adds: “Since that point, rates have come off those highs and lenders have returned to those fixed-rate product spaces; there is now a far greater product choice available to landlord borrowers.”

Stress testing has come under great scrutiny as the higher rates have pushed many BTL businesses outside of the lending criteria.  

Lenders continue to explore alternative ways of stress testing, especially existing BTL loans that have been previously approved under previous stress testing rates.  

Ima Jackson-Obot is deputy features editor at FTAdviser