It’s no secret that in recent months the Buy to Let market has seen some real challenges as a result of the mini budget in September 2022. Following the announcement of numerous tax cuts and other changes, we saw the market go into turmoil with increases in interest rates across the board overnight. One area of the market which was particularly affected was the Buy to Let market, due to many lenders relying on interest rates to determine what they can lend to potential clients.
The majority of lenders in the Buy to Let space will use a minimum Interest Coverage Ratio (ICR). This is essentially a rate they set to ensure the rental income covers the mortgage payment at an assumed interest rate. These have always been higher than actual interest rates to account for increases in the future. They were between 4.5% – 5.5% with most lenders in summer 2022. As interest rates started to increase sharply, this led to many lenders having to withdraw from the Buy to Let market in order to review what their ICR should be set at. Shortly after the mini-budget lenders replaced their ICRs with far higher calculations, some as high as 8.5% to account for the increases in rates across the market. This essentially meant that in many cases the rental income that was being charged / due to be charged was nowhere near enough to meet the ICR set by lenders, meaning the mortgage was no longer achievable.
This resulted in many Buy to Let mortgages being deemed unaffordable based on the calculations lenders use, compared to being more than affordable before. The changes caused real issues for prospective clients looking to purchase or remortgage Buy to Let properties. The Buy to Let re-mortgage market was heavily impacted leaving many clients whose current products were coming to an end with little to no options as the rental income was no longer enough to obtain a new mortgage.
Since then we’ve seen some improvements in the Buy to Let market with interest rates reducing and subsequently lenders ICR and stress rate calculations following suit. Although something we have noticed in recent times is that although Buy to Let interest rates are falling, it’s not at the same pace as other areas of the market such as the residential mortgage market. There are now interest rates as low as 4.03% for a 2-year fixed rate and 4.52% on a 5-year fixed rate (at the time of writing) at 75% loan to value. These Buy to Let mortgage rates on the face of it may come across as quite attractive compared to 3-4 months ago, however, it’s important to be aware of product fees being charged by lenders to obtain these sorts of rates.
Something we’ve seen many lenders do is to increase the product/arrangement fees for certain products, some as high as 7% of the mortgage amount being requested! This allows them to reduce the rate being offered but then is supplemented by larger fees which do not always mean it’s the best option to go for. Seeking specialist advice on your mortgage options is vital to ensure you’re getting a product that meets your needs and circumstances.
In summary, we’ve certainly seen some improvements in the Buy to Let market, especially the Buy to Let Re-mortgage market with new interest rates and criteria being introduced almost every day.
Having advice from a qualified professional in today’s Buy to Let market is more important now than ever before. If you’re interested to find out your options, please contact us on 01252 214044.