Buy-to-Let in 2023: Our Chief Mortgage Officer shares his thoughts

Written by Mike Cook

This year has felt tough for a lot of reasons. From inflation to post-Truss bad tidings, the risk of a house price crash, mortgage rates constantly going up – it’s no wonder some landlords are wondering if it’s all still worth the effort. But I think a little differently.

Reflecting on the past 12 months

As winter arrives, bringing with it all the usual viruses and misery, we must ask ourselves: is it all doom and gloom, or are there some rays of light in amongst the naysaying? Let’s have a quick look at what’s been going on:

House prices

Why buy if your lovely asset is going to be worth a lot less than what you paid for it? Well, the reality is, we’re experiencing more of a blip than a bust. A painful decline to be sure, but not the nightmarish collapse many expected.

Inflation & rates

To cool demand, the Bank of England kept raising interest rates, which was followed by rather gloomy, if predictable commentary along the lines of ‘rates must stay higher for longer’. This projection makes fixed rates higher, as banks need to secure a profit margin.

It becomes a self-fulfilling prophecy. The knock-on impact is higher rates for landlords who then require higher rents to service the mortgage. If you can’t increase the rent, you could end up making a loss. This also puts off new potential landlords.

We have seen a few landlords flee the market this year, which is a shame, but it has led to opportunities for other property investors to both expand or enter a different sector of the market.

Impact on developers

Higher finance costs, combined with higher labour and building supply costs, may have made some projects no longer viable. The domino effect being that new projects were likely slowed down or put on hold.

Wait and see what 2024 brings

Where those reliant on finance may pump the breaks, cash-rich investors tend to jump on opportunities at times like these and wait for ‘bargain’ properties. But will this continue into 2024? Let’s have a look at what we can expect to see in the new year:

The Government loves its taxes

Yes, we all feel the pinch, and landlords are no exception. They’ve had a few difficult years now, and they need to be supported as we head into 2024. The country needs a strong and large private rented sector otherwise where will people live?

Struggle for lender’s

If you rely on a single funding line, like a few of our peers, and that institution gets cold feet or cuts risk appetite – you may have to disappoint brokers. Some may have stopped lending altogether, or gone back on offers, it’s nothing we haven’t seen before. This is why it’s so crucial to have multiple funding lines behind you.

The Outlook

So, when you have a (mainly) grey beard like mine, it shows this is nothing new. It happens. It hurts, for a bit, a few more greys appear, and then gets better (but the greys, infuriatingly, still stay). Economies have cycles – like washing machines – and this year somebody put the new red top in with the whites. But will 2024 be better? I believe so!

Buy-to-let market

If we look at Zoopla’s latest Rental Market Report. Annual rental inflation for new lets within the UK rose by +9.7%, and while UK rental inflation for new lets is looking to slow to 5% by December 2024 – the number remains in the positives.

2022 was a record year for buy-to-let (BTL) lending, and UK Finance recently shared their predicted end of year volumes for 2023 (a rather large drop!) and their forecast for the year ahead, which also isn’t a cracker. But I’m not so sure – things change quick, and with rents and swap rates fluid, I think some positivity is incoming.

Bridging market

On the flipside, the bridging market has grown this year. Applications, when compared to the quarter ended June 2023, Q3 ASTL data showed an increase of 5.6%, rising to £9.7bn. Loan books also hit a new high of £7.3bn, according to the data, growing 2.0% . As housing transactions fell through, bridging products proved their worth to many.

What can homeowners expect?

If you bought your house a while back, then it’s likely its value has gone up in the last 3 years! In fact, house prices increased by 1% between September to October 2023, according to Nationwide. The lack of supply and new properties being built appears to be helping sustain prices. Poachers waiting for a crash never got it. They still want to buy though, so negotiations will come to the forefront in 2024

Whilst there are predictions of 0 to -3% in capital value across the UK in 2024, a much-needed sunny spell appears shortly after that, with an 17.9% increase predicted by 2028; according to Savills 5-year forecast. Over the long term, property is still, arguably, a strong investment.

Costs should push downwards

You’d have seen lots of high street competition in recent months as rates are in fact coming down. The costs of lenders fixing money peaked in July, and now the underlying cost of a 5-year fixed rate is now roughly 1.2% cheaper. Inflation is also slowing, and commentators are starting to question the Bank of England’s pessimism and tact. Meaning, we should be expecting rates to keep offering better value in the coming months.

High rents mean more income, surely?

Well, if a few small landlords have left the market, there are fewer properties available to rent. For some, reducing rates and increasing rents is a successful combination, especially in a tax-efficient company structure.

Also, some may be wondering if rates go down, doesn’t that mean BTL becomes quite profitable? It may do but it wholly depends on individual circumstances. Next year could be a good one for landlords, so long as they position themselves well.

Should I diversify?

In short – and my opinion – yes. Within the BTL world alone, lots of experienced landlords have realised that yields may be higher, and the tax environment more favourable in commercial assets and mixed-use properties. It isn’t a coincidence we’re launching into this area! It’s important to seek out qualified professional advice however, as they will be able to help you decide if this fits with your overall goals.

Will there be more bridging?

Oh yes. People will still want to buy quickly, renovate, convert, exit development loans for breathing space and make money. If that’s your job, you don’t want to wait forever. People adjust to the new norm, and developers can’t sit on their hands forever. All these factors and preferences can be aided by a solid, well-thought-out bridging loan.

In summary, 2023 was a blip. A bum year. They happen. Market Financial Solutions is in a good position – we haven’t stopped lending, we have a large number of funding lines behind us, we’ve grown our workforce, we’ve expanded our products, and we’ve invested in tech. We are ready for 2024, so you can be too.