On Thursday May 11th, the Bank of England opted to raise the base rate by 25 basis points to 4.50%. We speak to Huy Le, a specialist finance broker for landlords and developers at Knight Frank Finance, to find out how the sector is holding up, where interest rates are moving, and how recent innovations can help landlords borrow more.
Hi Huy, the UK base rate is now at its highest level since 2008 and the past few years have been particularly difficult for landlords. Yet, many of your clients are still opting to refinance or expand their portfolios, why is that?
The buy-to-let sector is under pressure but it’s holding up better than you might think. The sector’s share of total mortgage lending held steady over the past twelve months according to official figures, and we put that down to landlords who are taking the longer view.
Stock has fallen in some locations as some landlords sold into the buoyant sales market in the wake of the pandemic and UK rents have soared almost 5% in the past twelve months. Demand for two-bedroom properties in London is up 59% since 2019, according to Rightmove.
That’s heaping pressure on prospective tenants. An acceptable supply of good quality rental properties will be vital to the UK’s economic success and both political parties are under considerable pressure to prevent supply dwindling. Meanwhile, most forecasters expect the Bank of England to cut the base rate to 3% by the end of next year and 2.5% by the end of 2025.
All of that suggests that the current conditions are difficult but likely temporary. There are peaks and troughs in any asset class and sometimes the right response is to hold or buy, rather than sell. The official figures suggest that many landlords understand that.
How are conditions in the market at the moment? Are mortgage rates still rising?
The mortgage market has changed significantly in the past twelve months. We’ve moved from rapid increases in rates to a period of relative stability. The lenders are busy, and we’ve seen several notch rates up in the past two weeks to avoid being the cheapest on the high street, but movements have been pretty small.
The lenders are generally offering tranches of funding at a given rate and when it’s gone, it’s gone. The best offers are taken quickly, so it’s worth staying in regular contact with a broker if you’re purchasing or refinancing soon.
What products are drawing the most interest?
The amount you can borrow depends on a rental calculation that gives you an Interest Coverage Ratio (ICR). As conditions are today, the two-year products are constraining how much landlords can borrow, relative to say a five-year fix. Earlier this month, I worked with a client who could borrow a maximum of £246,000 with a two-year product, but £300,000 on a five-year. The five-year products are charged at higher rates, which is a conundrum for landlords. The right option really depends on how much you need to borrow, your appetite for risk, and how you view the outlook for interest rates.
Some lenders are finding workarounds. We’re seeing one or two bring the five-year rates down and add a larger arrangement fee, which boosts the amount you can borrow.
Innovations like that are a growing theme in the mortgage market today. Lenders are eager to overcome higher rates with new methods and maintain market share. There is much more to come.
If you are a landlord looking to refinance, expand your portfolio, or would like a conversation to assess your options, contact Huy on 020 7861 1659 or email huy.le@knightfrankfinance.com