Why Recession doesn't need to be a dirty word for Landlords
With yet another Bank of England interest rate rise, the UK government are coming under severe pressure from the mortgage industry and opposition political parties. They are hoping to leverage enough pressure to implement measures to help the mortgage industry and stop the challenges borrowers will face as they either go onto new mortgage rates or seek new Buy-to-Let opportunities.
The current Buy-to-Let landscape
Currently the biggest challenge in the market is affordability. The mortgage rates we are seeing are proving to a challenge to find a property where rental yield covers the appropriate affordability measures lenders insist on meeting. However, the current rising rates and helping borrowers are not the main priority anymore for the UK government.
Presently, the UK government are resisting measures to provide relief for borrowers, with the primary concern for the UK government being the inflation rate. This is proving something of a conundrum for UK prime minister Rishi Sunak, who at the start of 2023, pledged to halve inflation, and it remains “number one priority”. This sentiment is echoed by the Governor of the Bank of England, Andrew Bailey, who would do “anything it takes” to bring down inflation, including potentially bringing about a recession.
Undoubtedly the term ‘recession’ has negative connotations, with the UK government and Bank of England Governor attempting to drive down inflation it may become inevitable. Essentially, higher interest rates will result in a high cost of borrowing, meaning more of your income must go on repayments, rather than goods or services.
Although recession can be the cause of short-term financial hardship, it does present opportunities for experienced, savvy landlords. Recessions can mean an increase in repossessions, with the Independent newspaper reporting “a 50 per cent increase in the number of homeowner-mortgaged properties being repossessed in the first quarter of 2023, compared with the previous three months”. This increase can mean investors with the finances in place, can purchase ‘traditional’ property at a potential lower market value.
During economic uncertainty house prices can fall due to borrowers not wanting to commit into buying properties or any other large expense. This can see rental figurers stabilise helping landlords to retain a healthy yield. Landlords will view properties as long-term investments, and typically property value will appreciate over time. While recession can cause slowdowns, and short-term, they are part of an economic cycle, and will mean economies will undoubtedly recover over time.
So, being able to purchase at a lower than ‘normal’ market value and receiving a higher yield, will also help the affordability challenges of the market. Specialist finance companies, like West One, work with clients who are looking at more unorthodox cases, whether it’s the type of property, or if the borrower has a complex background there is still the opportunity to explore their level of potential borrowing.
By taking a patient and strategic approach, investors can weather the storm of a recession and potentially benefit from the recovery and subsequent growth in the real estate market, that will inevitably come back around.
What should landlords consider in a Recession?
As with all property investing, there will also be a level of risk that must be considered, especially in a time of economic downturn, which can see the housing market cool and mortgage rates increasing.
Investors should adopt a flexibility in their approach to the type of properties they acquire. The traditional ‘two down, three up’ house may not meet affordability challenges due to rental yield. Looking at student lets, Holiday Lets, HMOs or MUFBs maybe more suitable to generate a higher rental income.
In the short-term, rates can further increase so having your finances to meet unexpected costs is important. Although in the longer-term when you come to refinance the mortgage cost may be lower, increasing your yield.
Any future UK recession will cause difficulties for many, but it can also create opportunities for investors. If the housing market quietens, prices may fall, sellers will become susceptible to accepting an offer below market value, and there may be less competition looking to buy. The experienced and professional landlords may identify opportunities to take advantage of the market and invest in a relatively stable property market.
The Highstreet might not be ideal in supporting investors due to the complexity of the market especially if they are deemed a complex borrower. Specialist lenders like West One can assess individuals’ needs by manually underwriting the application to understand the challenges of borrowers. Working with brokers, and specialist lenders like West One, provide different approaches to affordability challenges which landlords face.
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