07 February 2024

Why 2024 will be another strong year for product transfers

By David Whittaker, CEO, Keystone Property Finance

Things were tough for landlords last year. They, like everyone else, were caught off guard by the speed and ferocity with which the Bank of England hiked interest rates.

Increasing interest rates 14 times in 20 months is nearly unheard of and culminated in the most aggressive tightening cycle in decades.

Unsurprisingly, we’ve seen mortgage rates follow suit over the past 18 months or so, leading to borrowing costs doubling for landlords. However, they have since rolled back a little.

The media prefers to focus on the damaging effect that higher rates have had on household finances, but landlords are not immune.

Some landlords may be able to compensate for higher borrowing costs by increasing their rents, but others can’t. They must simply take the hit.

But higher rates are not just affecting landlords’ profits; they are also affecting their ability to get a mortgage in the first place.

Higher interest rates mean that some property investors are unable to reach the same levels of leverage that they did before. In this scenario they have little option but to stump up the cash to make up the shortfall – if they are in a position to do so, which many won’t be.

It’s because of this that we have seen a spike in product transfer business over the past 18 months.

Looking at our own book, PT lending was up 0.6% last year and accounted for nearly 4.5% of all our lending. Speaking to friends and colleagues in the industry, that is typically right across the buy-to-let sector.

PTs are an attractive proposition for landlords because they are quick, convenient and the affordability requirements are less onerous. That’s especially important if a landlord thinks they no longer meet other lenders’ criteria.

However, PTs create challenges for lenders, as the lower fees make it more difficult to make the sums adds up, even if there is far less work involved.

The question is: will PTs remain a popular option among landlords in 2024? Yes, at least until the Bank of England starts to reduce interest rates.

Most market observers believe the Bank of England will be forced to cut rates several times this year. However, those cuts are not expected until the back end of the year – if at all – and, even if they do arrive, they are likely to be small and gradual.

That means there is probably not much scope for mortgage rates to fall much further than they are now, at least until the Bank signals it is ready to push the big red button.

As a result, many landlords will continue to struggle to meet lenders’ stress testing requirement, even though many providers have tried to offer some relief by offering low-rate, high-fee products.

Until rates start to fall, the vast majority of the 210,000 landlords UK Finance says are set to refinance this year will likely opt for a PT.

That said, if or when the Bank decides to pull the trigger, and borrowing costs start to come down, I expect remortgage activity to recover.

Once that happens, it will signal a return to a healthier market and will provide landlords with even more options when it comes to refinancing.

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