Why lenders' criteria is a challenge for Buy-to-Let borrowers
The biggest challenge facing landlords is passing lenders' interest coverage ratio (ICR) requirements, according to a lending buy-to-let expert.
Andrew Ferguson, Managing Director of Buy-to-Let, said ICRs have become 'a major hurdle' for landlords over the past year.
"To make ICR challenges work landlords are still having to inject further capital into their transactions on a regular basis,"Ferguson told Mortgage Introducer."ICR challenges will persist, but landlords will find they have more choice and flexibility in how they manage this issue."
He added that he expects to see further mortgage rate reductions, declaring this as "good news for brokers and their clients". These, along with some positive economic developments, have eased some of the pressure being felt by Buy-to-Let borrowers, he noted.
Buy-to-Let market resilient
"The market has been resilient and innovative over the past 12 months",Ferguson said."Lenders have introduced products with higher arrangement fees and lower rates to give landlords the leverage they need to access the loan they want.
"There has also been a notable rise in the availability of product transfers as lenders look to support borrowers. Product transfers have provided a viable solution for landlords who have found themselves frozen out of the remortgage market."
West One Loans' portfolio includes bridging loans, development finance, buy-to-let, second charge and residential mortgages. Earlier this month it opened its Buy-to-Let range to more borrowers, declaring it would now consider lending to foreign nationals and first-time buyers, as part of criteria revamp.
Ferguson believes the strength of the market remains a major plus point for landlords.
"Rents for new lets are up 9.7% on average over the past 12 months," he said, referring to recent Zoopla figures. "This growth is helping many landlords to maintain profit margins even with rising inflation and higher interest rates.
"Rental yields are being suppressed in London and many parts of the south, but in the northeast and Scotland in particular, yields are still as high as 7% or 8%. Clearly, there are still good investment opportunities out there for landlords and as confidence slowly returns, buy-to-let investors will increasingly be looking to seek these out."
Finding value in the buy-to-let market
Ferguson further predicts that landlords will pursue properties where they can add value, whether that’s through a major renovation, converting unused space or landscaping.
“This is certainly one-way landlords can combat rising costs and potentially increase their rental income,” he explained. “The use of short-term funding, such as bridging, to facilitate this is something we are seen a lot of in the past year.
“The growth of the specialist sector is a recurring theme, with landlords keen to save money through the likes of limited company structures as well as increasing revenue through higher yielding properties like HMO and MUFBs.”
The UK economy has proven itself to be far stronger than many people believed it would be, Ferguson suggested.
“While some economists are pencilling in a mild recession in 2024, many of them said the same about 2023,” he pointed out. “Therefore, it wouldn’t surprise me if the economy defied expectations again this year.
“I’m also far more optimistic about the buy-to-let market’s prospects than I was even a few weeks ago. Swap rates are much lower than they were a month ago, with markets now pricing in quicker-than-expected reductions in base rate. While the Bank of England insists rates aren’t going anywhere for the time being, markets are betting on at least three cuts in 2024, with the base rate expected to be around 4% at the end of the year.”
He enthused:“Falling mortgage rates and talk of interest rate cuts are boosting borrower confidence, and we have seen a corresponding uplift in buy-to-let activity, with brokers and landlords more actively seeking to transact again. Many perhaps feel that the worst is now over and we are on a more positive trajectory.
“I don’t think anyone expects the super low-interest rate environment to return anytime soon, if ever, but things are looking far more optimistic than they were.”
Commitment to the buy-to-let market
Ferguson acknowledged that the past 18 months have been a challenging time for the buy-to-let market, but West One Loans remains committed to the sector for the long term.
“Buy-to-let is a key division for West One and so we will continue to invest time and effort growing it,” he confirmed. “We’ve taken the opportunity to refresh our products and criteria in recent months.
“We’re aiming to hire new staff, and grow lending and despite the positive changes we’ve made in recent months, we are looking at how we can further improve our criteria in the months ahead. I’m excited for our prospects as a lender over the coming year.”