Views from the top make a hillwalker’s arduous climb worthwhile. It is getting down that strains the sinews. UK challenger banks have a similar problem. Many specialise in buy-to-let residential mortgages. Some senior bankers privately believe higher interest rates will expose these to exceptional strains.
Banks such as OSB Group and Paragon, at peak profitability, say they see no signs of stress on their BTL loan books. Even so markets have walked their share prices down 30 per cent since mid-August, a steeper fall than for high-street banks. They trade at mid single-digit forward price/earnings ratios.
There is genuine reason for concern. Typical fixed five-year UK mortgages rates have soared this year, from below 2 per cent to more than 6 per cent today. BTL mortgages are typically interest-only, which means they lack the safety valve of lower capital repayments.
For a landlord who has borrowed perhaps 70 per cent against the value of a residence, higher rates will crimp cash flow. Passing these on to tenants will be difficult during a cost of living crisis.
The most recent ONS lifestyle survey of households shows that almost a third of respondents struggle to keep up with rent. In addition, landlords face added costs to meet new environmental regulations, points out Ray Boulger at John Charcol. Some may instead try to offload their properties into a weakening market.
Paragon and OSB have £11.8bn and just over £9bn of BTL loans on their books, making up the majority. Their capital buffers are decent. Paragon had a common equity tier one capital ratio of 15.9 per cent, and OSB 18.9 per cent, as of June. The latter has not released any of its pandemic-era provisions.
Both lenders say that would-be UK renters healthily outnumber the number of rental properties. Average rental listings at agent branches have dropped nearly 60 per cent in just two years, according to Zoopla, a listings service. Everyone needs a place to shelter.
They need to eat as well. Some tenants with unaffordable housing costs will move in with friends or family instead. At the same time, rising costs will give even the most prudent BTL landlords pause for thought about raising debt to buy new properties.
Expect the BTL business to grind ever slower as fixed-rate mortgage borrowers are forced to refinance. BTL lenders and their investors should watch out for stumbles on their way downhill.
The Lex team is interested in hearing more from readers. Please tell us what you think of the BTL housing business in the comments section below