What is driving the Specialist Residential and Buy-to-Let markets this year?

   Paul Huxter - Head of Clubs and Networks

It's been well-documented that in previous years, the UK economy has been under pressure, impacting the daily lives of households.

Higher interest rate environments, coupled with high inflation that is now showing positive signs of beginning to reverse, and heading towards the 2% government target as of Q1 2024, have already left their mark on borrowers and their future purchases in the last few years. 

The market is still witnessing homeowners leaving fixed-rate mortgages taken out at a time when the BoE base rate was 2.25%. It's estimated that around 1.5 million homeowners fixed-rate mortgage deals will end in 2024.

Additionally, the BoE also estimates that five million homeowners will see monthly mortgage payments rise between now and 2026. With this economic backdrop, what trends are the specialist mortgage market seeing?

Drivers for the Residential Mortgage market

When considering a first or new home, questions like "How much can I borrow?", "How much will it cost me?", and "Can I afford the home I want?" are paramount.

Expectations on what is 'affordable' can be impacted by various factors which may fall outside societal norms of dual household incomes, stable 9-5 employment, good credit, with a track record of mortgage payments without any credit blips. 

Saying "Yes" to impaired credit and Adverse 

West One approaches Residential mortgages with real-life in mind. The lending criteria and products are designed to reflect this, meaning adverse credit does not need to be an obstacle to homeownership. 

A key to this is not operating credit scoring but assessing each case on its own merits. Particularly, when specialist lenders aim to provide flexibility within product ranges, including:

• Satisfied defaults & CCJs ignored (except Higher LTV products)
• Unsatisfied defaults & CCJs for no more than £500 each ignored (except Higher LTV products)
• Utility & comms accounts ignored even if defaulted (all products)
• Unsatisfied defaults & CCJs of more than £500 each accepted 
• Mortgage arrears accepted, even if within the last 12 months 
• Missed/late unsecured credit payments accepted

Think outside the Residential box - Capital Raising 

West One Residential products extend beyond just buying a new home. Taking into account the current economic environment of higher BoE interest rates and a higher cost of living, with house prices on an upward trajectory over the long term, affordability and the general cost of living are proving to be challenges.

Could there be an emphasis on using existing equity to raise capital? With an increased cost of borrowing, including car finance, credit cards, and other loan arrangements, with the total unsecured debt per UK adult in January 2024 at £4,161 according to The Money Charity. 

With West One, we can raise capital for most legal purposes including debt consolidation to 90% LTV. With West One's fast-track legal service, we have seen cases completed within 4 days, saving borrowers £800 per month as they consolidated debt away from another specialist lender to West One. 

The need for capital raising in the market will also support those borrowers looking to undertake home improvements. If helping with affordability for a new home when you need more space, or if circumstances mean property alterations/extensions are needed; if this is the question, capital raising could be an answer.

Drivers for the Buy-to-Let market

Property prices, higher borrowing rates, and an increased cost of living are all factors where a strategic approach is essential for investors when looking at higher-yielding Buy-to-Let investments. Regardless of whether it's a primary or secondary form of income, the profit margin and re-evaluating the type or property must be considered. 

More than just two-down, three-up when it comes to Buy-to-Let

Considering different types of property, away from the traditional 2-down, and three-up, properties may see an increase in yield. The British Landlord Association reported that a House of Multiple Occupancy (HMO) property averages a yield of 7.5%, almost 4% more than a sing-let property, which averages 3.63%. 

These types of properties are not just for experienced landlords, West One considers first-time landlords when it comes to HMO, Multi-Unit Freehold Blocks (MUFB) and Holiday-Lets.

A buzz-term in 2023, Interest Cover Ratio (ICRs), we arguably the biggest challenge for the Buy-to-Let market. Being able to adequately demonstrate the ability to cover interest payments is key when acquiring a Buy-to-Let mortgage.

Innovative use of product fees can help overcome affordability and rate pressures, having a higher product fee allows the lender to offset the interest rate, reducing it sometimes significantly providing greater ICR leverage. It may not be suitable for all scenarios, but it can provide options for clients, as they try to achieve their lending ambition.

The complexities of Buy-to-Let can mean that opportunities need to be discussed. The experienced West One team will always look to provide solutions as we recognize some scenarios are not always straightforward. 

The Specialist Residential and Buy-to-Let markets in the UK are being driven by a combination of economic factors and changing consumer needs. With a backdrop of higher interest rates and recent inflation, homeowners are seeking flexibility in mortgage products, particularly in light of the increased financial pressures over the last few years. 

Specialist lenders like West One are offering tailored solutions, accommodating borrowers who require flexibility and speed. 

Furthermore, in the Buy-to-Let sector, investors could strategically consider higher-yielding properties such as HMOs while also navigating challenges like Interest Cover Ratios. Innovative approaches, such as utilising product fees to lower interest rates, are being explored to enhance affordability and yield. 

Amidst these complexities, experienced teams like West One are poised to provide tailored solutions, recognising that not all opportunities are straightforward. Therefore, being able to communicate and discuss opportunities with West One can help brokers navigate the opportunities of 2024.