How are specialist lenders stepping up to support borrowers?

For brokers and borrowers alike, 2023 has been a challenging year. As the financial sector continues to grapple with the aftermath of 2022’s mini-Budget, specialist lenders are stepping up to fill the space left by product withdrawals and those with less risk appetite.

A whirlwind year

2023 has been a year of many moving parts. As inflation, swap rates and the base rate remained stubbornly high, lenders, brokers and borrowers grappled to adjust to the new norm. By the autumn, Nationwide declared in its October House Price Index that while UK house prices had risen 0.9% month on month in October, they were down 3.3% on October 2022. This softening in prices has gone hand-in-hand with a much slower property market, with Nationwide reporting that 43,300 mortgages were approved for house purchases in September which is around 30% below monthly average in 2019. High interest rates and down valuations are factors that are likely to have played a part in this. There has also been a swathe of products pulled with little to no notice, with Moneyfacts finding that in an eight-day period in May there was a 14% decrease in the amount of buy-to-let mortgages for new landlords. It is events like this that further compounded the uncertainty felt by many borrowers.

A flexible alternative

Throughout the uncertainty, specialist lending has acted as something of a prop to the mortgage market. With both homeowners and landlords affected by a range of factors including rate hikes and stress tests, specialist lenders have been finding ways to support those unable to be placed by their high street counterparts.

Bridging in particular has proved itself to be powerful tool. It has long been known for its speed and flexibility, attributes which have made it an attractive alternative to those who need to move quickly but another advantage it has is how an application is assessed. For example, many bridging lenders will not judge a loan application on credit history. Instead, they will focus on both the value of the asset and the borrower’s future plans. As well as providing the client with increased flexibility, it also offers an alternative to applications based predominantly on their income. There is also a willingness to take on complex cases. Cross charges, second charges and refinances are all options that borrowers have at their disposal.

Borrowers continue to tap into bridging’s speed and versatility

Over the past few years there has been a concerted effort by both brokers and lenders to educate customers about the different options available to them, including bridging finance. It seems to be working. In the third quarter of 2023, Bridging Trends – a quarterly infographic developed by MT Finance which monitors the latest trends in bridging finance lending in the UK – contributor gross lending was up by 15.3% compared to Q2, rising from £165.7 million to £191 million. This highlights how borrowers are utilising bridging’s flexibility in the current climate. For example, 22% of bridging loans taken out in Q3 were used to prevent a chain break. That borrowers turned to bridging is no surprise, particularly when considering that a loan can often be turned around in a matter of days as opposed to a traditional mortgage taking weeks if not months.

We are also seeing an increasing number of borrowers utilising bridging finance for auction purchases, with demand nearly doubling from 6% in Q2 to 10% in Q3. Property auctions have become increasingly popular since many moved online during the pandemic. This increased accessibility has seen savvy buyers take advantage of lower prices and increased choice, with auction House UK reporting a 20% increase in the number of properties sold between January and August 2023 compared to the same period in 2022.

Specialist buy-to-let also has a part to play

It isn’t just bridging lenders that are offering solutions to clients in the current climate, it’s also those providing long-term finance. In particular, specialist buy-to-let lenders have stepped up to support landlords and investors in the wake of 2022’s mini-Budget. Like those in the bridging space, they know that cases are rarely black and white and, subsequently, they are more likely to consider the grey. Other benefits of placing a case with a specialist buy-to-let lender include what is often a more varied product range – including securing against semi-commercial properties and holidays lets – and increased flexibility. Affordability is another key consideration. As many of you will have already seen, the Bank of England has warned that the average increase in buy-to-let mortgage repayments will be around £275 by the end of 2025. For landlords and investors looking to either purchase a new asset or remortgage an existing one, this rise in costs could have a significant impact on what they could borrow.

With this in mind, it is well worth considering what a lender’s ICR is set at. When tougher underwriting standards were introduced in 2016 by the Prudential Regulation Authority (PRA) and put into practice in 2017, the guidance acknowledged that the “current industry standard is to set the minimum ICR threshold at 125%” and that a variety of factors – including rental demand, the borrower’s property-related costs and any tax liability associated with the asset – “may lead to higher minimum ICR thresholds”. In some cases this can rise to 145%, or even 165%. On paper, this higher threshold makes sense to help safeguard against a high interest environment and to ensure borrowers aren’t going to default. However, the reality is that it can some applicants can struggle to meet ICR stress testing at 145% or 165%, particularly in the current climate.

With many high street lenders adverse to perceived risks – particularly at the moment – specialist lenders tend to be more flexible when it comes to affordability. For example, some are offering stress testing from 125%. As well as making the mortgage more affordable, it can also allow a borrower to purchase a property with a smaller deposit.

Reassuring borrowers

I would also argue that when we’re faced with a higher interest rate environment, both brokers and lenders have even more of a responsibility to safeguard borrowers. Many of our intermediary partners have been doing just this, including scheduling more check-ins with their clients and – when it comes to bridging loans – ensuring they have a plan B to exit out of their loan. Meanwhile, lenders should also be doing their due diligence at the beginning of an application and ensuring that repayment options are realistic and achievable. While these have always been crucial components, they have become absolutely vital in the current climate.

Looking forward to 2024

Despite all the challenges we've faced in the past 12 months, there are still reasons to be hopeful about 2024. Inflation dropped to 4.6% in October, thanks to lower gas and electricity prices. While it is still well above the Bank of England’s target of 2%, there are hopes that that this could lead to a further plateauing of the base rate, or even a reduction. If that were to happen, it would undoubtedly boost confidence for landlords and first-time buyers. It’s also worth remembering that first-time buyers have until 31st March 2025 to take advantage of the raised nil-rate threshold for properties valued up to £625,000. If interest rates do start to come down further, this might just be the push they need to make their first purchase.

There's also been a decrease in swap rates and, according to Chatham Financial, this trend is likely to continue. This means there is an increased chance we may see lower interest rates in the near future.