Rates are starting to drop, and there are products that have appeared which are actually below 5%, that too for BTL properties. Only the other day we quoted for a client regarding a remortgage on a 5-year fixed.
This drop is starting to make BTL investment justifiable again. Though, I do think property owners have been spoilt, since Feb 2009 until March 2022 we have had a rate of 1% or below. It becomes normalised, people’s lifestyles and expenditure increases in line with the surplus income. They don’t see what’s around the corner and tend to live for the moment.
I had a client who was on a base rate tracker, 0.39% below base, when the rate dropped to 0.1%, technically the bank should pay him; however, there was a clause in the contract specifying a nominal payment.
Given the base rate is currently 5.25%, it seems the anticipation is that there will be further rate reductions as the five year rates are below this level. Only time will tell.
Rental cover, which is the multiple of rent over the monthly mortgage payment, never used to be an issue; typically it needs to be 125% or 145% of the monthly payment. It never was an issue but all of a sudden it governs the amount one can borrow, the actual value of the property being a secondary consideration. This criteria, which puts a ceiling on the amount one can borrow, has become the governing factor. There are some lenders who have evolved to allow for something known as top slicing whereby when the rent is not sufficient, they use the borrower’s surplus income as a top up to get to the amount required.
Some readers may recall in Oct 1989 the base rate went all the way up to 14.88%, nearly triple of the current rates. The reason for this hike was partly to control house prices which rose steeply by 79% from 1982 to 1989. This hike had the effect of dropping prices, as expected, to a level where the income to house price ratio was three times.
Back then the average house price was £56,615 and the average wage was £11,327, a multiple of 5 times. Currently, the average house price is £287,546 and the average income is £33,402, a multiple of 8.6 times.
To compound this, I suspect you could actually buy a house for £56K in 1989. The current average figure given for a property will most likely only buy you a flat. This would serve to increase the multiple to even higher levels.
The difference between the two periods is, more people trust and have faith in UK property. They also accept if there is a storm it is a temporary one, and when it clears this asset class will bounce back.
Investors have become more focused on finding property deals. Investments presented now by the big agents tend to be around 8-10% yield, accommodating the recent rate hikes.