There are a lot of seemingly conflicting forces at play in the UK housing and mortgage markets at present, and in such an environment, it would be quite understandable if there is confusion from borrowers about where they currently sit, what they can achieve finance-wise, and where that leaves them for the future.
Certainly, in the buy-to-let market we can see a number of ongoing developments within the sector, and within the PRS, which might leave many landlords wondering what to do next, and for a number, questioning the ongoing viability of their existing property investments.
The shift in mortgage product pricing from the historical lows landlord borrowers benefited from, certainly in the pre-‘Mini Budget 2022’ period, was swift and sharp, and has undoubtedly heaped pressure on those landlords who have come to the end of their mortgage deals in the 12 months since.
Buy-to-let mortgage rates are tracking at least 2-3% above what was achievable just 18-24 months ago, and that unfortunately leaves a significant number of landlords – mainly those with just one or two properties – having difficulty in terms of meeting the affordability challenge that comes with higher rates, even when rents have grown.
That is still a fundamental in our sector, however it should be obvious to all advisers active in this space, that if they can work with the client and the lender to make this next mortgage work then there is, in my opinion, a brighter future to be had in which profitability can be sustained and asset values may increase.
Take the first part of that. Our own Rental Barometer during 2023 has shown strong rental yield levels across every single region in which Fleet lends in England and Wales.
It’s not rocket science to work out why that is the case – demand for PRS properties remains very strong in the face of ongoing challenges in buying a first property, while – and this matches what is going on in the owner-occupation space – the supply of available property is nowhere near matching that demand.
When that happens, rents rise, plus, when you have to meet higher rental coverage to secure your mortgage, this also adds to many landlords relooking at what is achievable for their property, or whether they might shift the type of tenants it appeals to in order to secure higher rents, or a combination of both.
Recent research from Hamptons suggests the recent rises in rents we have seen are unlikely to slow down in the years ahead because of those fundamentals mentioned above – namely more tenants competing for fewer properties, less purchase transactions, a greater number of individual households, etc.
According to that research, the average rent on a newly-let property in Great Britain will rise 8% in the last quarter of this year, 7% in Q4 2024, and 5% in both Q4 2025 and 2026.
You can see why. Even with the current difficulties they face and the increased costs that obviously come with renting out property today – landlords, particularly professional landlords, will be inclined to stay invested and may also be looking to add to portfolios, especially given a drop-off in house price levels.
Again, it will all come down to the availability of supply and the cost of finance, but given house prices have fallen – down by 5.5% over the last year according to Nationwide – and there could still be some way to go, landlords might view the months ahead as a prime time to look at adding to portfolios, although we may not see this in any significant number until next year.
And, while the same Hamptons data only shows a 5.5% increase in house prices over the next three years, landlords who can buy now, will benefit from those rental increases, and over a longer-term horizon, should also benefit from an increase in property asset values. After all, it still looks highly unlikely that the supply of new property is going to meet the demand during that period.
In those scenarios, and particularly as we have moved towards that more professional/portfolio landlord base – utilising limited companies, more likely to purchase higher-yielding properties, more inclined to buy properties with an EPC of C and above – their need for buy-to-let finance is not going to wane. Quite the opposite.
This is a long-term play though, and we have to approach landlord borrowers’ finances with that in mind. And that is by seeking to provide solutions which work right now, but with one eye on the future, particularly if we do start to see rates dipping as a result of swaps falling or expectations for higher rates falling back.
It’s vitally important we as lenders continue to provide a raft of product options for landlord borrowers who will all have different thoughts on their future, on what they want to do with their properties, and about how they meet the current challenges in the short-term but also what they’d ideally like to achieve in the medium to long-term.
The environment does seem uncertain at present, and it is this very situation, that should mean landlord borrowers want and need your advice to help them make the right call. By doing so they can be in a much better position to benefit from a future which, if Hamptons are right, should still deliver very good income and returns for those landlords who can stay the course.
Steve Cox is chief commercial officer at Fleet Mortgages