A Glimmer of Hope for Landlords

Written on 28 November 2022 by Nicholas Mendes

Expat Mortgage

With the cost of living and mortgage rate increases, all too often the immediate reaction is to think about how this is going to affect homeowners and first-time buyers’ opportunities to get on the property ladder. These are certainly important things to consider and talk about. Nonetheless, it’s equally important to take a moment and reflect on how this could also affect landlords and what repercussions there could be on the housing marketing in the long term.

In recent months – with rates increasing and interest coverage ratio (ICR) - landlords have had limited options, meaning they either had to sell up or increase rents in a period where tenants are already trying to combat their own increasing household inflation in food and energy.

A Moody’s report highlighted:

If landlords who come to the end of a fixed-rate deal in 2023 or 2024 have to pay mortgage rates that are 4 percentage points higher than currently, more than half will be unable to remortgage unless they raise rents.

It went on to add in this scenario landlords would need to increase rent by 27% to be able to refinance.

Imagine trying to impose a 27% rent rise in today’s climate, with the likely result of it forcing landlords into selling which will only heighten the social housing issues further.

How Lenders Assess Buy-to-Let Affordability

Lenders assess affordability for buy-to-let 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 125pc for limited companies and basic rate taxpayers, and 145pc for higher rate taxpayers.

Fall Out Following the Mini Budget

Following the mini Budget rates increased and products were pulled with little to no notice. As a result of increased rates, ICR calculations meant landlords were unable to refinance when coming to the end of their deal.

If we take the example that there was a 4% increase in mortgage rates by the end of 2023 and no rent rise, that would push existing landlords coming out of a fixed rate below their minimum ICR requirement and as a result they wouldn’t be able to refinance on a like-for-like basis.

As my esteemed colleague Ray Boulger points out at a recent treasury committee:

Ray Boulger, senior technical director at broker John Charcol, warned that the recent mortgage mayhem could have “a serious impact on the availability of rental property in the next year or 2.”

Adding “how landlords coming off 2 or 5 year fixes since the mini Budget in September faced going from an interest rate of about 2% to around 6%. With most landlords paying buy-to-let mortgages on an interest-only basis, this means many landlords faced monthly payments going up by 200%, compared to a rise of about 50% for owner-occupiers with repayment mortgages.

As a result, “The stress test is a big issue for landlords, especially in London and the South East where yields are low anyway. Many landlords will only be able to borrow at 50% loan-to-value and landlords needing to borrow more than 50% of a property’s value will find it very difficult."

Thank you, Ray couldn’t have put it better myself!

This was in a period following the mini Budget - a moment of blips among many this year - with the newly formed government in place markets are reacting well and we head towards a period of stability with rates slowly reducing.

Moving Forward

As rates have started to settle, lenders are looking to make changes to help landlords.

The typical cost of 5 year fixed rates peaked at 6.8% on the 18th October, but they’ve since fallen back to 6.57% as of the 23rd November, a reduction of 0.23%. Still short of where we were pre-mini Budget when rates were averaging 4.72%.

Recently Virgin Money has scrapped its minimum income requirement for interest coverage ratio for buy-to-let applications. As a result of recent times the lender had considered a client’s income to help service the loan, also known as top slicing.

Buy-to-let rates have also reduced recently with Vida, Aldermore and TMW to name a few.

It would be great to see more lenders offering a product transfer and support to landlords as this would avoid needing to go through lenders’ full stress tests, which will typically be more restrictive now mortgage rates have gone up.

For any landlords coming to an end of a fixed rate, get in touch with one of our experienced mortgage advisers on 0330 433 2927.

Category: Nicholas Mendes