Ashley Pearson, Head of Intermediaries at Loughborough Building Society
The last few years have proven to be somewhat challenging for many UK consumers, with rising living costs, soaring inflation and ongoing uncertainty presenting a significant number of challenges for many mortgage borrowers.
In the buy-to-let (BTL) sector, this has been further exacerbated by unfavourable tax changes such as the withdrawal of mortgage tax relief, the stamp duty land tax reform, a variety of increased regulatory demands, all of which have placed a squeeze on the profit margins of landlords.
For many smaller and accidental landlords, the combined impact of all these changes has been significant, with many finding themselves stuck with nowhere to go or having to move onto a less attractive product transfer deal.
Yet, as the end of another year rapidly approaches, there are signs that the UK economy is beginning to show signs of recovery. Inflation has fallen to its lowest level in two years, reaching 4.6% in October and the Bank of England base rate has remained steady at 5.25% since August following 14 consecutive hikes since December 2021.
This will come as welcome news for many BTL borrowers, particularly those who have seen their finances stretched and profit margins squeezed over the last few years and as such, will seek ways to reduce their costs and boost their borrowing power by seeking out the lowest rates when their current deal expires.
However, while it’s certainly true that interest rates are beginning to see a downward spiral, it’s important that any broker looking to address the needs of their BTL clients look beyond the headline rate when assessing affordability to ensure the product offers the best possible outcome for their clients’ needs.
For example, a broker may find that, in some cases, a lower rate mortgage product actually comes with a higher fee – even as much as 7% to 8% of the overall loan value – therefore making the cost of borrowing significantly more than if a client took out a product with a slightly higher interest rate. In comparison, a product with a slightly higher rate may have a lower fee and work out to be more cost effective over the term of the mortgage and save the client money.
Assessing the way in which lenders calculate affordability can also make a difference to the borrowing capacity of some BTL landlords, with features such as top-slicing proving a useful tool in maximising affordability among borrowers. Approaches to the offering of such a facility will also differ from lender to lender. Here at The Loughborough, we top-slice at 90% of a borrower’s disposable income, which can make a significant difference in those situations where a landlord’s rental income fails to sufficiently cover the BTL mortgage interest repayments.
For example, a client with a net monthly income of £3,000 and a net disposable income of £1,002.70 after all mortgage payments, loans and essential expenditure costs are factored in, can use 90% of their disposable income towards the rental coverage, the equivalent of £902.43.
This can provide a substantial boost to their affordability, particularly when compared to a product where top-slicing occurs at 60%, as it can increase the client’s borrowing capacity and help them secure a more cost-effective deal for their needs.
Of course, there will always be situations where a lower rate higher fee product may better suit the needs of a client, in which case, recommending the product will be best advice. However, for any broker with a BTL client looking to secure a mortgage, looking beyond the headline rate and taking a broader look at how the true cost of a BTL product is calculated is an important consideration when determining the best and most affordable deal for their needs.