Easing the burden of rental stress tests for landlords

Grant Hendry, director of sales at Foundation Home Loans, explores how landlords are looking to reshape their portfolios to bring on board properties which are able to deliver higher yields.

Related topics:  Blogs,  Mortgages,  Buy-to-let
Grant Hendry | Foundation Home Loans
5th March 2024
Grant Hendry FHL
"It is no surprise to see landlords wanting to maximise the rental value of their properties, and indeed moving into areas which are able to deliver them a much higher rental yield than they might otherwise secure."

One area of the buy-to-let mortgage market, and landlord borrowers’ place within it, which will be clearly noticeable to advisers – particularly over the last 12-18 months – is the nature of rates and their impact on affordability, mortgage costs, and ultimately the profitability of those properties.

We were fortunate to have a very low interest rate environment for over 10 years, and while none of us believed this would last forever, the shock of rates rising – specifically in a very short space of time – was always going to hit hard.

In this context, it is no surprise to see landlords wanting to maximise the rental value of their properties, and indeed moving into areas which are able to deliver them a much higher rental yield than they might otherwise secure.

That is very important, not just to have the rent to cover the increased mortgage payments, but of course to secure the finance in the first place. Rental stress tests have been challenging for many landlords, which is why we have seen a number of different product choices emerge over the last 12 months in order to ease that burden.

However, even prior to the rate rises which began to have a major impact at the tail-end of 2022, many landlords – especially professional players – were looking to reshape their portfolios where possible in order to bring on board properties which were able to deliver higher yields.

Certainly, we have seen this at Foundation, where those landlords who were in a position to purchase were more likely to look at HMO/multi-unit block options, plus we saw a growing number of conversions of properties in order to turn them into higher-yielding assets.

It will not take a genius to work out why this has been a path much trodden by landlords, given it is these properties which have tended to deliver the highest yields in recent times, with research by BVA BDRC recently showing it is larger portfolio landlords (those with 11-plus properties) who are achieving the higher yields, on average.

Yields have, of course, increased significantly over the past year or so – the most recent data showing they were up to 5.6% in the last quarter of 2023 – and this has much to do with strong tenant demand and the relative shortage of supply.

However, the most recent BVA BDRC data also shows tenant demand may well be plateauing, or at least the perception of it from landlords. 63% of landlords reported increased tenant demand in the last three months of 2023, which was down by 80% on the previous quarter, and reflects a lack of certainty about how tenant demand might progress in the future.

Certainly, if that demand does begin to tail off – even slightly – then it may well solidify landlord thoughts on ensuring properties within the portfolio are as attractive as possible to tenants, and that they deliver the required rental yield, and then some, in order to deliver a profit.

Again, we come back to those higher-yielding properties such as HMOs/MUBs which may not need to be fully-occupied at all times in order to deliver that strong income/yield. Landlords are incredibly savvy about what their portfolio needs, and what they should be delivering to market, and as mentioned, we are increasingly seeing a move towards such properties.

This is part of the reason why we recently improved the affordability criteria for shorter-term buy-to-let properties, lowering our notional stress rate from ‘the higher of 8% or pay rate plus 2%’ to ‘the higher of 6% or pay-rate plus 2%’. And, of course, it’s partly why we launched a new brand, ‘Solutions by Foundation’ purely focused on specialist criteria and products for mixed-use and multi-occupation buy-to-let properties for UK landlords and expats.

By doing this, we can allow borrowing up to 75% LTV on large HMOs, up to 10 bedrooms (this was eight previously), while we also have large HMO five-year fixes for properties with unlimited bedrooms. Clearly, it’s a more complex property type – favoured by experienced portfolio landlords – and means we can look at individual deals and structures and hopefully ensure the landlord borrower is able to secure the finance they need.

The PRS is by no means wholly dominated by professional and portfolio landlord players, but their number is growing, and because this is a business and a living for many, they are much more aware of what they should be doing with their portfolios and how they can ensure each individual property investment does rather more than simply ‘wash its face’.

Our expectation is that we – and you - will see more interest, demand and activity in the HMO/MUB space and our new brand and team is here to support advisers supporting those clients who want a lender that understands the sector and can provide them with competitive financing to make the most of the investment.

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