January, which has just ended, is typically cold, lacking in daylight and dominated by dieting and alcohol abstinence. Everything generally feels a bit deflated following the festive break.
But this year it felt a little different, with a renewed sense of optimism in the air.
A number of metrics suggest that this year will be better than last, economically speaking at least, and this is likely to be reflected in both the volume and the type of mortgage business introduced by brokers.
There is a lot of equity baked in to the BTL sector
Figures released by the Office for National Statistics (ONS) in January revealed that UK GDP had grown by 0.3% in November, which was more than expected following a contraction of the same amount during October. This followed forecasts by Oxford Economics, Investec and Deutsche Bank of inflation falling to the government’s 2% target by April 2024.
Further ONS data revealed that, in the year to December, the government had borrowed £5bn less than forecasted by the Office for Budget Responsibility. These are all great stats.
Such unexpected indications that the economy is rebounding more swiftly than first thought have led to calls for the Bank of England to bring down the base rate earlier than expected and have contributed to a reduction in swap rates.
Cheaper borrowing
This fall in the cost of funding has enabled us to reduce both interest rates and interest coverage ratio calculations to make borrowing generally more affordable for landlords.
Other lenders have also reduced rates and, even though swaps have stuttered a little off the back of an escalation of geopolitical tension in the Middle East, I’m incredibly optimistic that more buy-to-let (BTL) mortgage rates will regularly start with a 4 this year.
As long as rates continue generally to come down, brokers will have more scope to use their expertise to support landlords
This will no doubt be welcomed by those landlords who have one of the 261,000 fixed-rate BTL mortgages due to mature between December 2023 and December 2024, according to figures published by CACI at the end of last year.
While this shows that maturities will again be a key source of business, our own data suggests that the remortgage market has broader scope, with landlords borrowing more to buy additional properties or upgrade existing ones. In fact, during 2023, 78% of the encumbered landlords who remortgaged with us took on extra funds, with the most popular reason being for portfolio growth and to maximise opportunities in the market.
In addition, a quarter of our remortgage business last year was for otherwise unencumbered landlords, with portfolio expansion and a desire to take advantage of market conditions also cited as the main drivers for borrowing against their existing properties.
Last year was all about finding products that landlords could afford
This highlights how brokers could benefit from knowing which customers could capitalise on any properties they own outright, again financing portfolio expansion or improvements to properties they already own, whether their own home or those they let out.
The English Private Landlord Survey provides a clue as to the potential size of this market, revealing how almost four in 10 (38%) landlords have no mortgage debt.
Further analysis shows that 63% of homes in the private rental sector are unencumbered, so there is a lot of equity baked in to the sector.
Sitting on hands
And, although we believe that the ‘landlord exodus’ story has been exaggerated, there is no doubt that many have chosen to sit on their hands, maybe taking advantage of strong savings rates while they await more favourable BTL market conditions.
Research undertaken for our Mortgage Intermediary Insight Report revealed that last year was all about finding products that landlords could afford. With product transfers requiring no stress testing, these were often the best option.
A number of metrics suggest that this year will be better than last, economically speaking at least
That may still turn out to be the case for those landlords who simply want pound-for-pound borrowing, so it is important that brokers build relationships and really know their clients. Being in regular contact will help them stay ahead of the game.
Encouragingly, as long as rates continue generally to come down, brokers will have more scope to use their expertise to support landlords in responding to the pent-up demand for quality rented homes.
Louisa Sedgwick is commercial director for mortgages at Paragon Bank
This article featured in the February 2024 edition of MS.
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