Mortgage Market Update: Nov 2022

Introduction

As most investors are aware the landscape of the mortgage market has changed drastically over the last 3 months. Base rate changes, the pound crashing and a disastrous minibudget have had somewhat of an adverse effect on finance and lending. All of this coupled with constant media headlines of an incoming property crash or correction is contributing to growing concerns for Investors all over the country regarding what’s next for property investors and BTL as an investment vehicle.

Changes in the Market

As a specialist broker, it has been a challenge having to continually adapt to lenders' changing rates, Changes in criteria & Stress test increases week on week, however, as with any challenge there is an opportunity for those best prepared. The biggest change In the mortgage market I have seen has been the change in the viability of fixed-rate mortgages.

At the start of the year, a vanilla BTL in a LTD Co at 75% LTV would have gotten a rate of around 3-3.5%. As of today, you’re looking at around 5-6% for the same loan on a fixed rate basis (Ltd Co)

And that’s for a Vanilla BTL. Specialist cases can be even higher.

Not only has this made it harder for investors to profit it has influenced how much you can borrow because of the increased stress tests lenders have started applying. Previously it was common for lenders to stress test your maximum borrowing at the “pay rate” (the same rate as the product you’re applying for) or around 5.5%. After the recent jump in rates, this meant that lenders resorted to stressing at 8% and above in some instances.

Now to put this in perspective, if you were looking at a BTL that gets ￡1000 in rental, on the previous stress test at 5.5% you would be able to borrow around ￡174,000

At an 8% stress test, your borrowing drops down to ￡120,000.

This presents a significant problem for investors looking to get into the market as they are having to put in larger deposits for the same property, which in turn makes it a less attractive investment in some cases. It also means existing borrowers may face potential issues when coming to refinance

Solutions

One potential solution to this problem it seems is to go for a variable or tracker rate product.

Tracker and variable rate products have been a lot less common in recent years purely because the price of fixed-rate mortgages has been low for so long, so they were not as attractive from an investment standpoint. However, with the recent changes in the marketplace described above, they may be the potential solution for a lot of investors.

Key differences between the products are that whilst on a fixed rate your payment is locked in for a period of typically 2-5 years, on a discount or variable rate product your payments tend to move in line with either the Bank of England Base rate or the lenders managed variable rate (which is usually linked to the BOE base rate) for an incentive period which is usually 1 or 2 Years.

For example, as of the date of this post (22/11/2022) The Mortgage Works (TMW) has a 2-year fixed rate at 4.99% for LTD Co BTL. They also have a 2-year Tracker at Base rate +0.49% which at the moment means a payment of 3.49%. (BOE Base rate is 3% at the time of this post). The Stress tests on the Tracker rates as a result are typically lower than that of the fixed rate meaning that it is more feasible for borrowers to look at tracker rates if they are looking to get the maximum borrowing available.

Another reason an increased number of investors are turning towards tracker rates is due to the low cost of exit compared to a fixed rate.

With nearly all fixed-rate mortgage products if you want to pay off the mortgage or refinance to another product within your incentive period you must pay an Early redemption charge (ERC) to do so.

Using the above example, the ERCs on the fixed rate is 2% in year 1 & 1% in year 2. On TMW's tracker rate, the ERCs are 0.75% in year 1 & 0.5% in Year 2. There are even some tracker rate products available with no ERCs.

Conclusion

So, what does all the above mean?

With the changes in the market making fixed rates a less viable option for some investors it’s not all doom and gloom. There is an opportunity for well-prepared investors where they may consider looking at a tracker rate as a more viable option going forward. As always, my advice to clients and prospects alike is to continue being vigilant and track your portfolios and most importantly seek professional advice.

Please feel free to reach out with any questions regarding the above if you would like further details on the nature of the products discussed.