Navigating the Buy-to-Let Mortgage Market from 2023 into 2024

The Financial Challenges of 2023

One of the glaring financial challenges in the BTL market this year has been the significant drop in new purchases, coupled with difficulties in remortgages due to higher interest rates impacting affordability. A recent client's case serves as a stark example of the predicaments faced by BTL property owners. My client had come to the end of a five-year fixed-rate mortgage at 2.99%, only to be confronted with a new variable rate of a staggering 7.54%, despite having a relatively low loan-to-value (LTV) ratio of 55%.

The client had three options: switch to a rate of 6.89%, which would consume all his rental surplus; opt for a 4.99% rate but add a hefty 10% fee to his loan; or find £30,000 to pay down the mortgage, securing a 4.99% rate with a 3% fee. While the 10% fee may seem excessive, it's crucial to recognise that it provides customers with options, especially when the alternative might be selling their property.

In this case, the client chose to lower the mortgage sum by £30,000, as he rightly anticipated the potential impact of adding 10% to his loan on affordability in the future. It's worth noting that, being a portfolio client, he had other properties with equity. Therefore, another viable option might have been to raise capital through a further advance or a second charge on one of his higher-yielding properties to cover the shortfall. This is just one example of the challenges that advisers have encountered in 2023.

Looking Ahead to 2024

While the BTL market has faced numerous challenges in 2023, there are signs of hope and resurgence on the horizon. In recent weeks, there has been increased activity in the market, possibly because landlords are starting to feel more reassured as interest rates appear to have stabilised. Furthermore, tenant demand is at a record high, with Rightmove reporting an average of 26 enquiries per property listed in the first 24 hours, up from just 10 enquiries per property 12 months ago. BDRC confirm the average portfolio size has also increased from 7.6 to 9.7 properties, and an impressive 68% of landlords are reporting profits.

Lenders are also regaining their footing and beginning to innovate again. Precise has reduced its stress test by 2%, Aldermore now includes potential future rent increases in its assessments, and Paragon has no background portfolio calculations. Additionally, for clients with holiday lets or Airbnb properties, some lenders exclude them from background calculations if they are operated formally as a business.

In 2024, the focus is expected to remain on HMO (House in Multiple Occupation) and multi-unit block (MUB) properties. The demand for accommodation and increased rental yield in these sectors are propelling the increase. However, many landlords are hesitant due to the enhanced requirements associated with these property types. Lenders often prefer lending to experienced landlords in these categories due to the risks of non-compliance. In recent cases, landlords were fined by local authorities for failing to meet all the requirements, with tenants playing a crucial role in reporting issues.

This is where a knowledgeable BTL adviser can truly add value. While advisers should excel at recommending the right mortgage products, they can further solidify their position by providing guidance on property-related matters. Advisers who can advise on HMO regulations, identify areas with high rental demand, and offer insights into different tenant types are likely to build loyal customer relationships with repeat business.

In conclusion, the BTL market in 2023 has presented its fair share of challenges, but there are promising signs of recovery and growth on the horizon. Mortgage advisers can play a pivotal role by not only understanding the financial intricacies but also by becoming experts in the property-related aspects of the BTL market. With the right knowledge and guidance, both advisers and their clients can navigate the ever-evolving BTL landscape successfully in 2024 and beyond.