Richard Rowntree, Managing Director for Mortgages, at Paragon Mortgages the buy to let specialist admits that there is a challenge from rising rates and a need to support borrowers during difficult economic times.
But he says “there is plenty pointing to the PRS (private rented sector) being in better health than the headlines suggest.”
He says he doesn’t underestimate the challenge posed by the current economic conditions, clearly that’s a serious challenge to many landlords. But, he says, he imagines he can speak for all lenders when “we take our responsibility to support our customers seriously.”
However, he maintains the sector is better equipped to navigate testing times than some would have you believe, but much of the media and political focus has been on the impact of rising interest rates on borrowers. “While it’s true that those exiting their current fixed-rate deals may face higher rates, we should note that of the two thirds of buy-to-let mortgages with fixed rates, only 17% are due to mature within the next year,” he says.
“Our experience shows that landlords are largely switching to a new product at the end of the term. With rates higher than they were five and two years ago, it’s likely that clients switch to products priced higher than their previous deals.
“One way we’ve developed our proposition to minimise the impact of this ‘payment shock’ is by offering a ‘track-to-fix’ feature on discounted SVR products. Borrowers with mortgages reaching maturity can switch from their current fixed rate, up to six months prior, to a discounted SVR and then transfer over to a Paragon fixed rate product at any point within the term and incur no ERCs.
“This provides the landlord with the certainty of refinancing and flexibility to track the market until more favourable fixed rates return.”
For those ready to write-off the PRS, one important factor we must not forget says Mr Rowntree - it is the continued high levels of demand for rented homes and the steadily increasing market rents this trend supports that’s important for investors.
Richard Rowntree cites Zoopla data, which shows that letting demand has consistently tracked above the five year average over the past 12 months. 54 per cent of surveyors taking part in RICS’ regular UK Residential Survey reported an increase in tenant demand in July this year.
Given the state of the UK housing market there’s no sign of any let up in rental demand. This is underpinned by the rate that new properties can be built, the high cost of housing and by several societal shifts such as an increasing number of households as the population grows and lives longer.
Paragon’s most recent survey of landlords carried out by research agency BVA BDRC revealed that just over a third of landlords experienced a tenant in rent arrears in the second quarter of the year which marks a small drop on Q1 and tracks in line with the long-term trend.
This, alongside the fact that landlords are typically lowly-geared, with little borrowing above 75 per cent loan-to-value, and plenty of equity in their portfolios, means that the majority are well-placed to withstand economic disruption.
UK Finance data shows that the proportion of accounts that are three months behind with their mortgage payments has increased to just 0.44 per cent, numbering approximately 8,980. This is from a low point of 0.39 per cent in the second quarter of 2022, which means it remains low overall.
These factors have helped repossessions to remain low. During the first quarter of the year, 440 buy-to-let properties we repossessed, according to UK Finance data. This compares to 400 in the same period in 2022.
These pointer show just how misleading sensationalist reporting can often be, omitting the figures that show how the sector is actually in good hands, It seems to be holding up well in the face of what is an undeniably challenging time for all industries, not just buy to let.
So, while we must recognise the threats, says Mr Rowntree, and we must work to mitigate them, it is important that we see the full picture. Providing landlords with advice that is balanced and based on facts to enable them to make informed investment decisions is a priority.
Other research shows portfolio landlords are still investing
Other previous research by Paragon showed that professional and larger-scale landlords are still investing and are increasing the size of their portfolios through more targeted investments.
Staying the course and with consistency, despite the current malaise, is the key for serious landlords who are building a portfolio of rental properties, using leverage to attain size, says Paragon. Their strategy is to maintain their existing property portfolios, while adding additional properties as buying opportunities arise.
This trend for many landlords indicates a steady commitment by them to the PRS. This approach is in contrast to many landlords with single or just a few properties, many of whom appear to have been exiting the sector.
There are many reasons why these landlords are inclined to leave, their reasons could be manifold, from managing tenant relations, struggling with new regulations, to facing market uncertainties. But for those with larger portfolios, the breadth of their holdings likely provides a buffer against individual property fluctuations and economies of scale kick in.
With an average portfolio size for these types of landlords now at 13.1 properties, their average size is up from 12.8 properties. This puts the value of the average professional landlord's portfolio at £1.76m, the highest ever recorded.
This trend defies all the changes and ongoing pressures on buy-to-let landlords. That’s in an operating environment that has seen big changes to the taxation rules and a big increase in the complexity and scope of the regulations affecting the sector.
A former Paragon survey of the buy to let market showed that these professional and larger scale landlords are roughly three times as likely to be purchasing another buy to let in the future than are small-scale landlords.
HMO (Houses in Multiple Occupation) purchases have also been on the up according to Paragon. The number of landlords considering purchasing an HMO was up from 5 per cent of landlords to 20 per cent it said. Paragon's reading of the evidence points to prospective buy to let buyers generally having more experience of the industry, and with an eye to improving the average income yields of their portfolios.
This is a result of trying to overcome the negatives of the tax rules. This previous survey covered some 200 experienced landlords. It showed that the number of landlords operating between 11 and 20 properties is beginning to grow, now accounting for 18% of this sample, which Paragon claims is up from 14 per cent.
But, says Paragon, despite these findings, overall landlord sentiment remains subdued with only 13% of the respondents feeling optimistic about the future. Landlords are being cautious about their overall financial position. Debt levels are down to just over one-third of the average portfolio value the lender says.