Limited Edition BTL products primed for today’s challenges
Limited-edition products set by specialist lenders see products often fit economic challenges. Innovative products developed by West One take onboard the challenges around LTV, Interest Coverage Ratio (ICR), Debt Service Cover Ratio (DSCR) and interest rates to create BTL products which allows investment in the marketplace.
One such product offering is around ‘Low rates, Higher fee’. Enabling investors to acquire a lower interest rate but coupled with a higher-than-average fee, paid at the start of the loan period, or spread across the term of the loan.
Read this West One guide on how ‘Low rates, Higher fee’ products can benefit you and your clients.
How to utilize ‘Low rates, Higher fee’ products?
Potentially daunting when seeing a fee attached to a product, but you must keep in mind, that there are many ways in which this can be advantageous.
The ICR presents the greatest challenge currently in the BTL market, with leverage reduced due to the higher stress rates and subsequent affordability calculation required by lenders. A flat lower interest rate is usually available at lower loan to value which can reduce the monthly cost, but you should consider that it does mean you may need to increase the initial investment to reduce the LTV. Without increasing the initial sum of deposit money, investors may not meet the affordability of many products offering a low rate. The fee which accompanies the product, can often be paid on approval or spread across the term of the mortgage providing clients greater flexibility.
‘Low rates, Higher fee’ products can assist those who may not be able to raise additional funds for those BTLs investments which don’t meet the affordability criteria set by lenders. The ‘Low rates, Higher fee’ products give investors access to a range of products at a lower rate than expected and allowing investors to meet the affordability challenges.
Do you have clients who are currently on a BTL mortgage or looking to secure finances?
When BTL rates increased during Q4 2022 following the Bank of England base rate increase, this caused BTL rates to increase substantially from where they have been in the previous decade. As BTL investors come off existing product rates, and are required to find alternative products, this will infer an increase in their mortgage payments.
Therefore, understanding your clients' existing BTL mortgages product, monthly cost and how change will impact your clients profitability is key to understanding how you can help them to secure funding.
What happens if ‘Low rates, Higher fee’ products don’t exist?
If an investor cannot find or if a product does not exist for them to meet affordability criteria and provide an acceptable Return-On-Investment (ROI), investors may consider selling existing property as monthly expenditure may either exceed rental income or ROI deemed insufficient.
Selling a property may also prove a difficult due to the current housing market challenges of failing prices, reluctant buyers or buyers facing affordability.
Alternatively, owners could face reversion rates around c.8-9%, if a suitable product is not found or if the borrower cannot secure a new mortgage. This rate would be substantially higher than any rate secured prior to start of rate rises in October 2022.
In the instance of looking for a new mortgage, a ‘Low rates, Higher fee’ products helps affordability challenges, can spread the cost across the term of the agreement and if interest rates begin to lower then potentially investors may be able to switch to a new product.
What is the best way to access a product to re-finance/remortgage?
Typically investors would refinance a BTL investment by moving the arrangement to a new product as the existing arrangement comes to an end. But with rates having changed considerably, this may not be an option. Taking on a new financing arrangement will alter the feasibility of ownership and investment. ‘Low rates, Higher fee’ products offered by West One are for a limited fixed period, giving the client the flexibility to switch to a new product, rather than having to face their current lenders' reversion rate. It may also present the opportunity to raise additional funds from the equity in their BTL property to use for any number of reasons.
Does the benefit of paying a fee outweigh the initial outlay?
As with all major financial transactions, all factors must be considered before making a decision. By understanding that a product (plus fee) gives you access to a wider range of product options that may yield a lower rate over the course of its term, and enable the client to secure the borrowing they are looking for.
As the property is often seen as a long-term investment, being able to capitalise on a beneficial long-term rate should be a key consideration when deciding on a product. Consuming the fee across the term of the product can present opportunities for investors which may not be available due to affordability constraints many are facing in today’s market.