MortgagesMar 9 2023

What's in store for the BTL market?

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What's in store for the BTL market?
(JoPanwatD/Envato)

So, what are the prospects for the BTL market in 2023?

Property prices have increased enormously over the past 10 years, but rental incomes have not increased at quite the same rate. 

Karen Noye, a mortgage expert at Quilter, explains when borrowing was at an all-time low and the stress tests were much more favourable, the difference between house price and rent growth was not so apparent. 

“However, in the higher interest rate environment we are now in, landlords are more limited in terms of what they can borrow, especially where a mortgage is already in place, and higher mortgage costs have resulted in a smaller profit margin for landlords,” she says.

“Over the past few months, we have witnessed a sizeable fall in the level of demand in the mortgage market, driven by the slowdown in the housing market.”

Tough times still ahead

While mortgage rates have dipped somewhat since the highs seen towards the end of last year, monthly costs remain far higher than many people had become accustomed to in recent years.

Noye adds: “Many landlords have had to put up their rents, but if the tenant(s) cannot afford the increased rent then the landlord may find themselves in a position where they need to find new tenants and/or have empty properties on their books.”

It’s going to be a tough year in the BTL sector and will continue to be so until interest rates drop.Luke Thompson, PAB Wealth

Luke Thompson, a financial adviser at PAB Wealth, agrees.

His biggest concern is landlords potentially leaving the market and flooding the market with properties and driving house prices lower.

Thompson says: “It’s going to be a tough year in the BTL sector and will continue to be so until interest rates drop. It is important to remember as well that we are coming off record-high house prices coupled with high interest rates.

“There won’t be many bargains to be had for investors, which would make me think that not many landlords will be looking to buy this year." 

Rate rollercoaster 

Carl Shave, director at Just Mortgage Brokers, says the BTL market will stagnate for the first half of 2023.

However, when the mortgage market has settled with lenders having adjusted their criteria to better suit, landlords will see the fall in property prices as an opportunity to once again invest in property.

It’s not a bad idea to look at ways to reduce your mortgage liability.Nicholas Mendes, John Charcol

Meanwhile, Nicholas Mendes, mortgage technical manager at John Charcol, says he expects mortgage rates will continue to be in a state of flux, despite fixed rates reducing slightly and swaps also reducing beginning of 2023.

Currently, tracker and discounted products remain cheaper than many fixed rate mortgage deals. 

With the base rate expected to peak at 4.25 per cent, and recent economic analysis commentary revising forecasting that any base rate decrease is unlikely until 2024, those with multiple properties coming out of a fix in 2023 may find it prudent to diversify their portfolio product mix.

ICR calculations

Another key issue according to Mendes will be interest coverage ratio (ICR) calculations.

He says: “It’s not a bad idea to look at ways to reduce your mortgage liability. For example, if you [allow] for mortgage overpayments on your portfolio this will reduce the portfolio LTV, which will allow you to access lower rates and minimise what you would pay back in the long term."

To overcome the ICR limitations when it comes to assessing borrowing, Mendes says he has seen some lenders introduce higher lender arrangement fees.

By increasing the arrangement fee, the lender can then offset a reduction in the fixed rate making the mortgage ICR more favourable. This allows the lender to still make a profit and the landlord to borrow at a cheaper rate.

How much an applicant earns should not potentially penalise them.Carl Shave, Just Mortgage Brokers

With energy performance certificate changes around the corner, Mendes says it would be great to see lenders look to incentivise landlords with access to cheaper loans, or for portfolio landlords, reduced ICR calculations with portfolios C or above. 

At R3 Mortgages, director Riz Malik says the firm has used the ‘top slicing' method on a number of occasions to help clients achieve their target loan requirements – something he says more lenders could use to help landlords with their financing requirements.

This involves assessing the landlord’s other forms of income to top up any shortfalls in the rental calculation.  

Malik says this favours landlords with a lot of disposable income but not those who do not. 

Reviving the market

According to Shave, two ways lenders can start to revive the BTL market is to first amend their stress levels for existing BTL loans.  

A BTL loan approved 12 months ago based on stress rates at the time does not simply turn into a risk too high to take on simply because the very reason the stress tests were applied has occurred, for example, because interest rates have risen.  

He argues that like-for-like remortgages should be looked upon with a more relaxed approach to stress testing.  

Shave adds: “I also believe that lenders need to relax their rules of loan to rent ratios based on a borrower’s tax bracket.  

“How much an applicant earns should not potentially penalise them. Just because someone earns more money should not mean they can borrow less simply because they are taxed more.  

“This is made more of a mockery when the same higher rate tax payer can purchase through a limited company and can then potentially borrow more for the same property as their personal tax status is now regarded as null and void for underwriting purposes.”

Ima Jackson-Obot is deputy features editor at FTAdviser