Criteria to be more important than ever in current climate for non-bank lenders

By Andrew Ferguson, Managing Director Buy-to-Let, West One Loans

For a lot of landlords, especially those who have entered the buy-to-let sector in the past 10 years or so, we are currently in unchartered territory.

Anyone who has built up a buy-to-let portfolio since February 2009 has known nothing other than rock-bottom, sub-one per cent interest rates.

But the Bank of England has hiked rates four times - hitting the one per cent threshold in the process - since December, meaning that the age of ultra-cheap lending is probably over - for now, at least.

Rising interest rates - and market expectations that there will be more on the horizon - have driven up swap rates, which are the key determiners of non-bank fixed-rate mortgage pricing.

In short, then, if swap rates rise, non-bank lenders have two choices: stomach the hit to your margins or increase your mortgage rates.

A disconnect in the market

Until now, many non-bank lenders have opted for the former, but margins have become so squeezed that many lenders have had no other option but to put up their prices 

That said, there still appears to be a disconnect in the market with some pricing appearing non-profitable for the lender. Evidently some lenders are supporting existing price points at levels that appear unsustainable. 

Over the past year, two-year swap rates have risen from around 0.3 per cent to nearly 2.2 per cent, while five-year swaps have shot up from around 0.7 per cent to roughly 2.1 per cent over the same period. 

Bizarrely, five-year money is actually cheaper than two-year money at the moment, which is perhaps worthy of a separate article in itself. 

But the point is that swap rates have risen significantly over the past year and so, inevitably, this has started to push up mortgage rates. 

Data from Moneyfacts reveals that the average buy-to-let two-year fixed rate has shot up from 3.22 per cent to 3.41 per cent in May alone, with the average five-year fixed rate climbing 14 basis points to 3.56 per cent. 

Trending upwards

Unfortunately for borrowers, that trend is likely to continue, with markets pricing in multiple rate rises this year and a base rate of 2.5 per cent by the middle of next year. 

That will in turn feed into swap rates and, eventually, fixed-rate pricing, meaning landlords are likely to pay significantly more in the future when they come to refinance. 

It is easy to see the negative side of this outcome, but we must also remember that the buy-to-let sector is incredibly agile and fluid, and has proven before it is able to adapt when conditions change. 

A decade or more of rock-bottom interest rates has resulted in many lenders, even in the specialist end of the market, adopting price as a key lever within their propositions. 

Pivot to criteria

What happens when conditions change and make that more difficult? For me, the obvious choice is to focus much more on differentiation through criteria and service. 

Lenders that understand the complexities of the market and the personal circumstances of borrowers will gain a competitive advantage over those reliant on price. 

I expect to see a real demand for criteria-based solutions for borrowers with credit blips, large portfolio landlords and those investing in specialist properties such as houses in multiple occupation (HMOs) and multi-unit blocks (MUBs), as well as the green agenda. I expect to see innovation and more bespoke offerings tailored to meet the needs of clients in today’s world. 

Of course, no two lenders are the same and each will take a different approach to drum up the business they want to achieve. 

However, if I were a betting man, I would wager that specialist lender boards up and down the country are looking at what criteria levers they can pull to help them achieve their targets. 

So, while the age of ultra-cheap lending may be over, I’m confident that, overall, landlords won’t be left worse off. 

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