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Welcome to my first mortgage market update for the HMO Roadmap.  I have felt like we’ve needed a daily update for a while now, as things are starting to settle and I can finally write something which may stand the test of time by the time you’ve come to read it!

So, what is going on with mortgage rates?

We have had a separation between the specialist and the vanilla specialist for a while now. The more vanilla specialist lenders have become more competitive and despite the base rate continuing to creep up, rates are still reducing.  Lenders are competing for the business, which means they are very much open for business and want to complete good volumes this year.

In the smaller, more specialist market, the hangover of business volumes from last year has been causing problems. Rates have stayed higher for longer, but this week, we have had some great new rates that bring the big competitors back in line with the rest of the market. We won’t be seeing rates back where they were before October for a long time (if ever!) but the margins now between the specialist and the vanilla specialists are smaller than they were. The appetite to lend in this space is increasing and that’s hugely positive news.

What about the rising popularity of variable rates?

We saw in the news recently that the number of new variable-rate mortgages is on the up.  With the longer-term prediction that the base rate will go down, you can see why they would be more popular.  It allows you to benefit from any reduction immediately, whenever that may be!

Variable rates on the whole are lower than an equivalent 5-year fixed rate, so initially, there is a saving.  You also have no or very little early repayment charges, which gives you the freedom to move as you, please.  The risk is that rates can go up as well as down (as we have seen!), so you don’t have a guarantee on your monthly outgoings.  Budgeting is more tricky, especially when you have uncertainty around energy prices too.

It’s important to discuss the options with your broker.

What impact is the base rate increase having on affordability?

This is becoming more of an issue and will be noticeable again now that the base rate is up to 4%.

You may have heard that arrangement fees are increasing with many lenders.  This is becoming a valuable tool for lenders to allow clients to maximise their borrowing.  It means that the rate is lower, but the cost is moved onto the arrangement fee.  This means that the rate that is being used to calculate your maximum borrowing is lower – so you are more likely to be able to borrow 75% LTV if you are tight on your rental.  This is only relevant on a 5-year as the shorter fixed and variable options are always stressed at a higher rate anyway.  

It is less of an issue for HMOs, but watch out for your single lets and SA properties (where the lender uses the single AST figure).

We are spending more time calculating the maximum borrowing as well as looking at the lowest rate and cost, so it’s even more important that you use a broker in these scenarios. 

What are my top tips for 2023?

The challenge this year is going to be the disparity between rates going up, factoring in the increased costs of mortgages and energy (for inclusive rentals), and when vendors start to accept that house prices are coming down.  It always takes a while to filter through to vendors, particularly when there is low stock available; and that is where we see the market slow while they catch up.

It is very important to be realistic with your values and GDV figures, and ensure that your deal is profitable before you proceed. It’s great to be optimistic, but make sure you have those realistic figures in there too! This is particularly important if you are using investor funds and/or bridging.  

We are seeing an increase in clients not being able to pull out enough on their refinance to repay their investors in full.  So, I would say make sure you are being realistic with your costs and refinance valuation, but also have the conversation with all parties – when do they need funds back by, and would they be happy with a delay?  Make sure you are looking at all possible outcomes.  ‘No money in’ deals become a problem when your GDV drops by 10%.

I hope this has been useful.  If you would like to book a call to discuss a current deal or your future plans then I am happy to do that. Contact me here.

About the Author:

Ellie Broadhurst is a specialist mortgage broker working at Baya Financial in partnership with The HMO Roadmap. She works with HMO property investors throughout their journey, from clients starting on their first project through to experienced portfolio landlords and developers. Learn more about Ellie here.