As the year draws to a close, Nick Sheppard, Managing Director of Framework Mortgaging, shares his 2023 experience as a mortgage provider and his expectations for the future of the UK property market.
2023 has been a challenging year for property investors. Lender funding costs have increased, and we’ve been forced to adjust and change investment strategies. Equities have rallied then stalled, and some bonds have looked unattractive due to a changing global economy.
Buy To Let (BTL) lending has also been tricky to navigate because of higher-than-expected product fees. At the time of writing, it costs lenders 4.8% to lend you money. This cost of funding is leading to minimal margins for lenders and we’re seeing lenders recovering their funds costs via high product fees. With these product fees being a percentage, it’s an eye-watering cost.
That’s not to say these challenges can’t be overcome. So, let’s review some of the biggest investing trends and hurdles and look at how you can manage them in 2024 and beyond.
Mortgages and interest rates
First, we’ll take a big picture view of mortgages and interest rates. The larger the mortgage balance, the larger the fee. Investors are faced with choosing between the lowest monthly payment possible (and a high fee) or the lowest actual cost over the initial fixed period. This option includes your interest payable and the product fee.
But there are ways to work through any associated costs and understanding your monthly costs vs the overall actual cost over the initial term is vital.
That brings me to interest rates. Higher interest rates and lower product fee options have sometimes lowered costs over the initial fixed period. Think of it as a balancing scale – on one side you have your interest rate and on the other you have your product fee. You can take the weight of debt on either side and your choice will come down to your preference over cash flow or scenario.
As the lender cost of funds settles, I hope to see a reduction in the product fees and 5-year fixed interest rates to remain in the high 4% area. As an investor, I have no issue with these rates, but they do put the focus on the property you’re purchasing. Are you buying an appreciating asset at a competitive price?
Remortgaging
Now, let’s talk about remortgaging. Because investors have to understand rental stress tests in this context. Proactivity is critical here, as failing rental stress tests could limit how much you can borrow. So, focusing on the transaction and the cost of future re-financing is essential in challenging markets.
For example, 75% 2-year fix options could look unappealing. Especially considering the cost of re-financing (broker, lender, and solicitor fees), dampened capital appreciation and additional product fees. Some short-term fix options could lead to extra cash input when re-financing. In a nutshell, understand your available lenders, market conditions, and re-financing costs.
BTL investing
BTL investing benefits from a diligent approach. The days of hard and fast mortgage advice with low rates are long gone, and investors will benefit from a wealth management approach here. After all, your portfolio, no matter how small or large, should receive the same focus as your pension or equities ISA. You must keep informed and up to date with market fluctuations.
Key takeaways for property investing in 2024
- It’s likely lenders will reduce their product fees and will offer more options to investors that are in line with their objectives.
- Re-focus your property investment goals and pick the right products. Low-rate options may be more expensive over the initial term, so don’t solely focus on your interest rate.
- Don’t overexpose yourself to one product or property type. That way, you’ll mitigate the fluctuating risks of interest rates, tenant void periods and maintenance.
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