Recent market activity has left many landlords concerned over the stability of the buy to let sector. Do lenders want to lend to landlords, and how have lender policies adapted to meet new market conditions?
With legislation changes and an imminent Base Rate rise more than likely, there are growing concerns from landlords over lender appetite. Recent inflationary figures have caused nervousness in the money markets and, as a result, an increase in SWAP rates. Landlords are understandably concerned about what this means for their mortgage products and applications.
As rates continue to rise and lender criteria shift, do lenders still want to lend on buy to let mortgage applications?
Do lenders want to lend?
A common misconception is that higher interest rates are a way for lenders to slow down their lending volumes but this is not the case.
In reality, lenders do want to lend to clients. However, their own cost of funds is changing regularly, leading to higher mortgage interest rate pricing.
What impacts lender pricing?
Buy to let mortgage lender pricing is heavily reliant on SWAP rate activity. SWAP rates are what lenders must pay to other financial institutions and corporations to acquire fixed funding for a specific amount of time.
Recent US inflation and debt ceiling debates, as well as our own core inflation figures, have caused SWAP rates to rise again. As the money markets remain uncertain over the economy’s stability and their confidence in UK inflation declines, SWAP rate pricing has continued to climb.
Consequently, lenders have had to increase their pricing to factor in this rise in their own costs and maintain profit margins.
How have lenders changed their criteria?
The most notable change in lender criteria is the higher rental calculations applied to applications. Typically, we used to see Rent to Interest (RTI) calculations of 145% at payrate for individual applicants and 125% at payrate for Limited Companies. Now, however, it’s not uncommon to see Limited Company applicants have to meet RTI calculations at 135% to reflect the increase in mortgage payments and interest rate pricing. There are also an increasing number of lenders stress testing at their SVR instead of payrate.
A landlord has an outstanding mortgage of £225,000 and charges £1,200 rent per month for the property. They’ve just come off a 3.99% fixed rate and need to remortgage. Originally, this was stress tested at 145% at 3.99%.
Under the new RTI calculations, it’s entirely possible the RTI on the same rent will be 145% at 5.5%. This means total available borrowing is only £180,893, some £44,000 short of what’s needed. Either the landlord needs to increase the rent to £1,495 (if supported by the valuation), find the shortfall from their own savings or speak to an experienced, independent broker to see whether they meet the criteria for another lender offering a more favourable calculation.
For further information about changes to Lender’s RTI calculations, read our article here.
Other than this increase in RTI calculations, lenders have, on the whole, maintained their policies or worked to open it up to benefit landlords more. It’s important to note that the cheapest interest rate may not be the best rate for you. Higher arrangement fees are unlikely to go away anytime soon, and you may find that taking a more expensive interest rate will cost you less over the term of the product.
14th June 2023