Is Now the Time for Landlords to Invest?
Refinancing in the current economic climate
Managing mortgages is never fun, is it? When you’re facing refinancing, even less so. With interest rates bouncing around all over the place, it is a worrying time for everyone, and no one more so than for landlords.
To try and clarify exactly what is happening with the money markets and how it will impact your bottom line, we caught up with Stephen Smith, non-executive director and consultant in financial services who has 40-years’ experience in making sense of this topsy-turvy world.
What’s the low down on high rates?
‘Well, even before the disastrous mini budget last autumn, it was expected that interest rates would rise this year,’ explained Stephen. ‘But what was expected was a slower rise to a lower peak. The mini budget precipitated serious market chaos, mortgage products withdrawn en masse, and there was a frenzy of repricing and in the forward money markets, it was like shock therapy and rates jumped too far higher than had been anticipated.’
‘The impact has been higher rates much more quickly. And the Bank of England base rate has now risen, and that has raised rates to 4% in just a few months. The market expects probably one further rise, as the bank seeks to control inflation. That said, the peaks are anticipated to be below the 5% rather than the 6% that many thought in November last year, but still above the 4% that the markets have been predicting last year. That’s the legacy of the mini budget.
Do landlords need to worry?
‘Base rate rises are not all bad news. They demonstrate to the money markets that the bank is serious about getting to grips with the economy and as a result forward rates start to fall,’ said Stephen. ‘This leads to fixed rate mortgages becoming more affordable. So, from a peak last November of five-year fixed rates being at around 6%, there are now some lenders offering rates below 4%, and this may fall a little further because there’s a sort of mini price war taking place amongst lenders who are keen to lend.’
‘Interestingly two-year fixes are currently more expensive than five-year fixes. And with the yield curve in this shape, the outlook is that rates for two and five years are likely to stay at around the current level for perhaps the next couple of years.
So, there is slight cause for tentative positivity, it’s not all doom and gloom!
How will the rise and fall impact landlords?
With so much change in the air, there is no doubt that there will be a knock-on effect somewhere for landlords (let’s be realistic, we’re used to feeling the pinch with every twist and turn)! How will this latest hiccup hit the sector?
‘Well, there certainly has been an effect of all that market turmoil’, admits Stephen. ‘Mortgage brokers saw a massive decline in business, a drop-off of about 50%. It was worse in the buy-to-let mortgage market where the drop was around 75%, because customers who didn’t have a pressure to decide simply didn’t. They sat on their hands and waited to see what would happen – wisely, in fact, because things have stabilised considerably since then. So the knock on effect of all of this in the housing market has been a fall in new instructions, people wanting to sell and a rise in fall throughs and withdrawals of agreed transactions, and that’s cast a shadow into the early part of 2023.’
HMRC Revenue and Customs recently published data showing:
- Completed sales in January as 27% lower than in December last year and down 7% annually
- Estate agency commentators have said that this is actually a sign that the market is stabilising
- Lloyds Banking Group suggest house prices would fall by 7% and Santander predicting 10%
- But even the most pessimistic forecast of price falls would only take us back to the end of 2021 – prices are still around 20% higher than they were pre-pandemic.
So, not looking like there’s going to be much opportunity to scoop up a bargain then… but will the changes bring any positivity?
‘Yes!’ laughs Stephen. ‘There are some other more optimistic forecasts and some reports saying that the year has started better. Estate agents are saying that the traditional selling season started with buyers and sellers being much more realistic about their proposed sale prices. And that will help to calm the market. It’s taken some of the froth out so to speak.’
‘In addition, the stabilisation of mortgage interest rates is giving confidence to buyers and sellers to get on with their moves. And at least two major estate agency groups are reporting an increase in the numbers of properties coming onto the market. The trade association that represents lenders have actually used the ‘green shoots’ phrase in their most recent market tracker. And they’ve said that there’s been a marked increase in broker confidence since the end of last year. So, I think in summary, I’d say that things are not going to be as bad as perhaps we thought at the end of last year.’
Should landlords be worried about history repeating itself?
Historically, interest rates impacting the mortgage market hasn’t ended happily for thousands of people. Many of us will remember the horrors of the 1980s and early ‘90s when interest rate rockets caused mass chaos across the country, and repossessions were rife.
Is there any danger of a repeat of Black Wednesday?
‘The mortgage market is in a different place from when inflation last got out of control,’ reassured Stephen. ‘We can always learn from history. Back in the 1990s, the vast majority of borrowers were on variable rates, which meant that their payments changed immediately, that bank base rate changed, whereas now the vast majority are on fixed rates. So, the impact unwinds over time.’
‘When an individual borrower’s fixed rate deal comes to an end, it needs refinancing. And this year, people coming to the end of say, two-or-five-year fixes that were originally granted under 2%, they’ll be looking to replace them and the rates are going to be 4% or possibly above. That’s a big step up.’
How can landlords find the best deal?
The numbers are big. And when you’re locking in for two to five years, it’s a pricey thing to get wrong. Refinancing is a scary step, so what are the best steps to take to ensure that you don’t make an expensive mistake when it comes to locking in?
‘It’s estimated around 1.8 million customers are going to be refinancing this year – there’s a recent report from Foundation Home Loans, saying that a third of all landlords will be seeking assistance with refinancing this year,’ said Stephen.
‘Always speak to a mortgage broker about this rather than just accepting the first offer for retention that your lender may make to you. There are some very good deals available in the market which a good broker will be able to find for you.’
Passing on the cost
It looks like it’s a fairly safe assumption that if you are looking at refinancing this year, you are going to have to bite the bullet and accept that your mortgage payments may rise. Very annoying, but it does seem like there’s not much we can do.
Is this a cost that can be passed on to tenants though? Obviously, there is the ability to raise rent within most contracts, clearly if you are facing a cost hike, it is acceptable to pass on a percentage of this to your tenant?
‘Landlords themselves are struggling to meet higher mortgage payments’, agreed Stephen. However, the cost-of-living crisis generally is impacting on the ability of tenants to meet rent rises that are being passed on to them by landlords increasing financing costs.’
‘Bank of England stats show that tenants in England, on average across the UK (but the figures more than double that in major cities) are using 24% of their net earnings on rents, so passing on rent rises is going to be difficult. Even though wages have been growing, landlords can’t assume that all tenants will be able to afford a rent rise. And those on low or fixed incomes, from pensions, for example, will be facing probably even more of a challenge. It’s those groups that inflation hurts most.’
‘We also have the long-term problem of housing not really being taken seriously by successive governments. Policy seems fairly vague and the rapid turnover of housing ministers – believe it or not, there have been 15 new housing ministers in the last 13 years – doesn’t really help things. I think the beating up of the private rented sector has probably gone far enough.’
Room for landlord optimism
It’s not all doom and gloom. In recent years, the private rented sector has taken a battering and it’s been tough. It’s made things difficult for private landlords. It’s not surprising that we’ve seen some landlords sell up and leave the market. And there’s more disruption to come.
But there’s one recent report showing that the sector has actually grown in the face of all those problems. Serious Property Finance had a report estimating that the private rented sector now stands at around 4.9 million properties. And that’s up from 2019, even in the face of all the challenges.
Another report from the National Residential Landlords Association provides a really strong justification for the private rented sector. It’s a sector of choice for significant numbers of people. The flexibility of renting helps the economy by making the labour market function better. And it shouldn’t be treated by the government as an inferior tenure, as outright home ownership is not for everybody.
Stephen’s top takeaways
Clearly, Stephen has given us plenty of food for thought. Whilst none of us can influence base rates of interest fluctuation, he has a few things to consider that we can control… whilst these issues won’t change the burgeoning costs, taking advantage of them might just help you work through the leaner times and come out the other side with a profitable portfolio.
- Shortage of rental stock. ‘There is a shortage of rental stock, a supply demand imbalance. And that will lead to higher rental prices, although landlords will have to be careful about seeking to pass on costing prices, because not all tenants will actually be able to afford to pay increased rents.’
- Expansion opportunities. ‘Some of the smaller landlords, or those less committed to the sector may seek to leave. That could mean that landlords who want to expand their portfolios could buy at good prices to increase their portfolio size.’
- Lenders looking to help. ‘There are signs that competition is returning in the buy-to-let mortgage market, lenders looking for ways to help landlords meet their borrowing needs. They’ve been doing this by offering lower rates with a fee and amending the stress testing.’
QUOTE: I’d say that if you know what you’re doing on upcoming regulation and on the challenge of issues such as energy performance certificates, it might now be the time to expand and put that expertise to use and as others decide to call it a day. It’ll be a good year to be at the top of your game.
To hear the whole conversation, watch the latest episode of the Mashroom Show now.
In the meantime, why not head over to the Mashroom Landlord Community on Facebook and join the conversation about the upcoming reforms. We’re all chatting about how it’s going to look for us, and we’d love to hear your thoughts!
See you there.