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This past week has been another crazy week in the mortgage world, so I thought I’d start with a summary of what’s happened to get us here.  Then I’ll look at some options as to what you can do to mitigate against the changes we are seeing.

So, what happened?

Each month we see an updated annual inflation figure, and we are all willing to come down as quickly as possible (for many reasons!), but last week we all got a bit of a shock as to how high it still is.  The rate of 8.7% was lower than in previous months but was nowhere near as low as we were all hoping.  This sent the markets into a bit of a panic, as many experts revised their Bank of England base rate predictions upwards to 5 or 5.5% by the end of this year to try and bring inflation down more quickly.  The knock-on effect was an increase to the swap rates of about 0.5%, which increased the cost of wholesale borrowing (where most lenders get their funds from).

We then saw lenders pulling their rates at short notice while they worked out where it was all heading, before launching higher-rate products. We have seen an increase of about 0.3-0.5% across the board, with some lenders yet to relaunch their fixed rates.  It will be interesting to see what happens over the next few weeks as things starts to stabilise.  It will be a balance between lenders still needing to do business, but at a rate that is profitable.

What can we expect to see long-term?

This is a tricky question to answer as always.  It depends on inflation, and no one seems to be able to track this accurately!  Food prices are still on the up, and with outside factors like the Ukraine conflict and labour shortages in the UK not resolving quickly, it is unlikely that we will see this calming down this year.  Many experts are now saying that inflation won’t be back under 2% until mid to late 2025, so it is looking like the short recovery that we were expecting won’t materialise.

Whether we see the base rate up at 5.5% by the end of this year is still up for debate, but it is looking more likely than a couple of months ago.

What can you do about it?

It is all about looking at your strategy and planning for the next couple of years.  You have of course got to take market conditions and trends into consideration but keep your long-term goal in the front of your mind.  Rental demand has never been stronger, and in a time of uncertainty, HMOs offer more security over your monthly costs than other rental options.

We are seeing plenty of opportunities to purchase property to convert or refurbish and I think this trend will continue.  Home buyers with stretched affordability want to know their costs, and going into a big build project is less likely to be on their agenda given the current market conditions.  This is great news for investors.  You have the experience to know costs and timescales, and we are seeing the refinance valuations come in as expected so it’s still possible to pull some of your money back out.

The key to future-proofing your portfolio is stress testing at a higher level and ensuring that it all still fits.  On a standard buy-to-let I would use 6-6.5% and for HMOs, I would be using 7-7.5%.  Ensure that your property works at that level before you buy it, don’t just rely on the current stress tests that your broker will do.  Be realistic with your rental figures too, as valuers are not using the top-end figures on valuations – even when it is a new refurbishment, which is frustrating!

The last thing to remember is that stress tests are lower on a 5-year fixed than a shorter fixed rate or tracker product.  This means you may have to have a 5-year fixed rate to achieve 75% of the value on your refinance.  You may want to use bridging finance to purchase and carry out an immediate refurbishment, rather than buying on a standard mortgage and refurbishing over time to allow you to get your money back out sooner, and have more certainty of what rate you will be going onto now.

I hope this helps, as always if you would like to have a chat then please get in touch 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.