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  • BTL landlords face harsh realities to achieve historical borrowing
  • Slowdown in enquiry levels and a shift in demand towards remortgage
  • Some lenders shying away from free legals

BTL landlords face harsh realities to achieve historical borrowing

It certainly is a tough time for a lot of landlords in today’s BTL market.

Historically, many landlords have geared themselves up in the low-rate environment, as gearing allowed the return on investment to be higher by having a lower capital requirement. For instance, it made more sense to own three properties with mortgages rather than have one in cash.

However, now many landlords are coming to refinance and found in some cases they cannot do so under current rates and stress testing. Either they are forced onto their current lender’s standard variable rate or to product switch with their current lender, and that’s if their current lender offers this. In other cases, they could refinance but the investment hardly makes sense anymore with the rates available.

Why BTL stress testing is impacting landlords

A lot of this comes down to stress rates. Most landlords have become accustomed to the lower rates they have been paying and the way that lenders work out borrowing levels. A good illustrative example is comparing what amount of borrowing £1,000 of rental income used to get a landlord compared to now:

Previously, £1,000 of rental income would get a landlord around £150,000 of borrowing with a mainstream lender, and with a specialist lender this could be between £200-230,000.

Though now with rates 2-3% higher in many circumstances it has affected these calculations significantly, with lenders stressing up and above the rate payable, in case rates continue to increase. Nowadays, £1,000 of rental may get you only £100-115,000 of borrowing even with many specialist lenders.

Some can borrow a bit more (topping out at around £145k based on the above): Basic rate taxpayers, those willing to take the risk of a tracker rate product and limited companies. Alternatively, many landlords are having to turn to discretionary personal income to top up borrowing levels which not all lenders offer, and most landlords wouldn’t satisfy the requirements for this.

It is a worrying time for many landlords and yet another thing they are having to endure. The buy-to-let market has changed significantly over the last 5 years

A slowdown in enquiry levels and a shift in demand towards remortgage

We have noticed a slowdown in enquiries, with enquiry levels being 26% lower over the last two weeks compared to the same period last year, and 31% below the running average with more ‘normal’ market conditions.

Historically, enquiry levels have been strong in the post summer months. However, this year the chaos in the mortgage market and general economy led to demand being higher than normal for a period of time. We are now noticing a decline in demand, in particular in the purchase market, albeit this has been slightly offset by an increase in remortgage demand.

How has the mini-budget impacted enquiry levels?

In the aftermath of the mini-budget, there was definitely an acceleration in rate rises, in which we now have higher rates much earlier than we may have had if markets didn’t react so sharply to Truss’s economic growth plan. The increased cost of borrowing and lower consumer confidence will have had an impact on many borrowers’ plans and delayed some people’s decision to buy. With the purchase market expected to slow down, we are now shifting from less purchase to more remortgage orientated activity.

Some lenders shying away from free legals

Recently we have noticed more lenders offering products that are specifically for those paying for their own solicitor, an example of this is Halifax remortgage products, which includes a cashback element to contribute towards the solicitor but no longer the option for free lender paid for legals.

We’ve noticed more cashback options rather than free legal options lately where historically a lender would offer either on the same rate we’ve seen more examples of just cashback or no incentives at all. This could just be due to lenders not necessarily needing to give incentives to encourage business considering the recent high demand, but it could also be due to the stress of free legals for many.

There are some free legal solicitors who may either take weeks to send out legal packs, their systems may not work properly for clients, they do not include a phone number on their website to call or they do not speak to brokers due to business volumes, amongst other things.

We have seen several examples where clients have struggled with the free legals that lenders provide and this seems to be worse than normal currently due to the amount of people remortgaging currently
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