As inflationary pressures continue to mount on the UK economy, there is an increasing likelihood that the Bank of England will soon raise the Bank Base Rate from its historic low of 0.1%.
This will have an impact on most property borrowers, but for buy-to-let investors it adds to a plethora of potential challenges they may have to deal with in 2022.
Although many in the City expected the Bank of England to increase the Base Rate last month, it looks like the Monetary Policy Committee (MPC) is trying to hold off for as long as possible, worried by the potential shock to borrowers who have become comfortable with low rates.
But this doesn’t mean its impact isn’t already being felt, as many lenders are pricing an expected rate increase into their loans. For buy-to-let borrowers, especially those with multiple properties in their portfolios, a rise in interest rates will not only increase their repayment costs, it will also trigger debates around whether they also need to put up the rent they charge their tenants.
For landlords, unlike residential borrowers, a buy-to-let mortgage is just one part of the cost of running a property business.
The strong possibility of a rate increase also makes fixed rate deals more appealing to investors, and we have already seen an uptick in interest in the fixed rate option for our new professional buy-to-let product.
I also think that the prospect of increasing mortgage costs will put more pressure on less experienced landlords, those borrowers with one or two properties, who will now question whether it’s profitable to run such a small portfolio in addition to their ‘day job’, just as previous changes to taxation did a few years ago.
This in turn is likely to continue a move towards increased professionalisation of the sector, with a focus on larger portfolio landlords and their needs.
As a result, we are also likely to see an increase in more complex cases from investors with multiple properties or seeking to finance properties that are different from what we’ve seen previously.
For example, the changes to working patterns we saw at the start of the COVID pandemic will persist for many businesses and their employees, leading to a reshaping of cities and worker behaviour.
There have been instances of city centre located businesses downsizing or moving out of their offices to accommodate the demands of more flexible working, which could lead to property owners and developers looking to convert commercial space into homes or mixed use with smaller retail businesses occupying city centre spaces.
We have already seen an increase in these Permitted Development Rights (PDR) schemes, something I think will continues as a legacy of COVID.
Even if their employers aren’t necessarily moving out of the cities, tenants are certainly looking to rent farther afield to improve their quality of life and the type of property they can afford, buoyed by work from home policies and the option to commute to work less frequently. This will increase occupier demand outside of economic hubs and lead to investors and landlords looking to buy in the new ‘hot spots’.
This trend will be given a further boost by the growing appeal of Build to Rent. Property owners like John Lewis are now getting into the sector and becoming landlords, often building rented accommodation above their retail spaces, making it available for their own employees as well as on the open market.
Not only does this re-shape the rental map, these new developments will heighten tenants’ expectations around the quality of property and services available.
In truth, professional landlords have already been looking at new areas to invest in property, driven by their own affordability as much as where people want to live. Investors are seeking stronger yields and are looking past larger cities and economic centres to achieve it.
According to Savills, rental growth in prime city-centre locations has fallen significantly over the last five years and there is a clear move by investors towards more regional locations to generate better returns.
Throw into the mix upcoming changes to the Energy Performance Certificate (EPC) scheme, whereby owners may have to spend more money on bringing their properties up to a higher standard of energy efficiency, there certainly seems to be a lot of challenges for landlords in the coming years.
I believe that all of these factors mean professional landlords and property investors need to work with advisers and lenders that understand the sector and what changes are coming down the pipeline, so they can be supportive of their needs and can work with them to create the right funding solutions.
For Recognise, and our own recent entry into the professional buy-to-let space, that has meant developing a proposition which is relationship-focused, that not only works with the adviser, but also with the client to tailor solutions based on their individual circumstances. We can be an extension of advisers in areas they may not know so well, supporting them throughout the entire application process.
This seems especially relevant to professional landlords and property investors who want a personal service where they can deal with experts who understand the market. Many borrowers know from bitter experience that getting an off-the-shelf BTL mortgage through a call centre may not be the best option.
As the sector moves towards the professional borrower and the size of portfolios grows, advisers will want to work with lenders who can help them, as well as their clients.
The good news is that there are lenders like Recognise Bank who are also aware of the changes to the sector on the horizon and are ready to support them.
