Interest rate rises, proposed minimum EPC requirements and a lack of housing stock could point to another difficult year for buy-to-let, but amidst these issues there could be opportunity for brokers to focus on other areas of their business.
Limited purchase activity as a result of supply constraints doesn’t necessarily have to mean a drop in business.
We are expecting remortgage business to be strong this year. The 2017 PRA changes, which altered the rental coverage needed for buy-to-let mortgages, drove a large proportion of landlords to go down the five-year fixed route which allowed a higher level of borrowing. These landlords will be coming out of the tie-in on those rates and will be able to remortgage or switch.
We have also seen a steady increase in the Bank of England bank base rate, something that is expected to continue into 2022. This will undoubtedly impact buy-to-let rates over the coming months, so, with borrowers seeking to secure a favorable rate ahead of any increases, brokers have a chance to get ahead of the curve and boost their remortgage business.
Now is the time to act on fixed rates
All this means that now could be the ideal time to secure a fixed rate for landlords who are nearing the end of their current rate and due to move onto the lender’s SVR. While we have started to see some lenders edging their rates up, the market is still very competitive. At the time of writing, TBMC’s own mortgage sourcing system is showing the lowest fixed rate available as 1.59 per cent.
After being tied in for five years, and considering the property price increases we have seen, many will have equity in the properties which they might want to gear up and reinvest in their portfolio. Brokers should be making full use of their back-book and contacting all of those landlords who took out five-year fixed rates back in 2017. With most offers being valid for at least three months, there is opportunity to apply well in advance of the customer coming out of their tie-in and secure a fixed rate well ahead.
This approach provides the opportunity to discuss both the switch products and alternative remortgage options offered by the client’s current lender.
Many lenders will have a good suite of product switches on offer, which can often be lower in fees and an easier transaction. We have seen a move towards lenders providing competitive product switch products and renumerating brokers properly for switch business. It’s also worth looking at the options available for remortgages as the competitiveness of the current market is driving a good variety of products and keeping headline rates down.
Remortgaging away from the current lender might allow the customer to benefit from a lower fixed rate in some instances and may also allow for capital raising. With the proposed EPC deadlines just around the corner there will certainly be a number of landlords needing to release some capital for property improvements.
Conversation is key
Having one holistic conversation about potential rate increases, EPC deadlines and the landlord’s whole portfolio and aspirations for the coming one to five years may well highlight a number of needs that the broker can help address. I’m a strong believer that we should look beyond the one mortgage requirement the landlord might have and be forging a stronger and long-term business relationship. This will help the landlord achieve their business goals and bring greater opportunity for the broker to write business.
Longer term fixed rate products have started to pop up, with terms of seven to 10 years. These rates could be an excellent option for landlords who want to fix in now while rates are still low. With the lowest fixed rate on a seven-year deal currently being 3.08 per cent from LendInvest, the landlord will be paying more than the two and five-year rates available, but for those wanting to lock in and have a level of security for an extended period, this could be an excellent choice.
Longer term fixed rates have historically not been a popular option, however in the current climate where interest rates going up is almost a certainty, I think more landlords will consider locking in for longer periods.
For all longer term fixed rates however, the broker community should be mindful of the pending proposed EPC changes. While nothing is written in stone yet, tying a landlord into a fixed rate which goes beyond the proposed deadline could mean locking equity away, which the landlord would need to get their portfolio up to the minimum EPC requirement of C .
Every discussion with landlords at this point should be covering off the EPC proposed changes and involve an in-depth look at the landlord’s whole portfolio and capital requirement needs. Releasing capital now for the works could not only allow for the landlord to lock into a longer term rate without the worry of tying up funds, but it could also mean releasing that capital at a lower cost before rates increase too much and give the landlord a longer run-in time to get the required works carried out.
The benefits of a long-term broker-client relationship
Whilst for the broker long-term fixed rates might not seem like good news, taking the opportunity to rebroke much further out, landlords hold more opportunity than one mortgage every few years. Being a landlord’s “go to” broker for all their portfolio financing needs can mean multiple applications a year. The landlord community is certainly one which talks to each other and referral business is an excellent way to get more landlords onto your books. Getting the trust of your landlords will undoubtedly bring more opportunity over and above the re-brokering of the initial mortgage. Brokers shouldn’t be afraid of letting their landlord customers know about these options.
With increasing interest rates, the buy-to-let market will undoubtedly see an increase of headline rates, future affordability many come under further pressure for products which work the rental coverage off the headline rate. It will be interesting to see how lenders navigate this.
We have already seen a rise in lenders using top slicing, enabling landlords’ income to be used to cover any shortfalls in rent coverage. I expect to see lenders looking for further innovative ways to help landlords to get the funds they need. From the brokers’ point of view there are many reasons to be opening dialogue with their landlord clients and it could be an excellent year to grow their remortgage business.