A Busier Start To The Year Than Expected

Posted in

August 2023

In early 2023, rates are declining, particularly the 5 Year SONIA SWAP rate, signalling a positive shift. Lenders are creatively addressing challenges like high stress testing by introducing reduced rates and alternative fee structures to support high-leverage borrowing.

The Rates Have Started To Come Down

At T&T Finance we were expecting a quieter start to 2023.

Towards the end of 2022, the market was slow and rates were
moving in the wrong direction.

Yet, we’ve seen rates starting to come down. The 5 Year SONIA SWAP rate is at its lowest compared to the last couple of months.

As you can see on this SONIA SWAP rate tracker – data taken this morning from Chatham Financial – the 5 Year rate has come down
to 3.528% despite it being at 3.954% just 4 weeks ago.

And this is feeding through to lenders who are reducing their pricing on the 5 Year fixed rate.

It seems to be an improved market as investors see the market settling after a turbulent couple of months.

Creative Solutions For Interest Coverage Ratio (ICR) Challenges

It’s been extremely challenging for borrowers to get the leverages and amounts they wanted over the last couple of months due to the stress testing being too high.

This is a byproduct of interest rates increasing and lenders being scared that the SWAP rates will further increase. This in turn caused the stress
to be higher than the rental income which reduces the amount clients
can borrow.

We have seen lenders adapt to this ICR challenge by structuring their products in a clever fashion.

One lender we work with has substantially increased their product fees to allow for the rate to be reduced which in turn reduces the stress testing. This allows for high-leverage borrowing which investors like to utilise.

Instead of charging a 2% fee, they are happy to charge a one-off 5%
fee and reduce the interest rate.

In another conversation with a lender, we were asked if we can choose the arrangement fee and bespoke the rate to reduce the ICR as much
as possible.

The Final Word

In the second half of January, we’ve seen an increase in enquiries
for our services.

Lenders are looking to increase their market share in 2023 and are coming up with more creative products to keep and enhance their market share. This is needed in 2023 more than in other years due to the volatility of the market.

And finally, I hope that you too have had a successful start to 2023.

Kind Regards,
Joseph Tesler