Buy-To-Let mortgages are getting more popular but tenants and first time buyers are feeling the pressure…

October 26, 2011

CIA Let Property Blog

Buy-to-let mortgages have become increasingly popular in recent months due to the continuing rise of rental prices, according to the bank of England.

Rental properties have become so popular it is leading would-be buyers to put in sealed bids in areas of the South East.

In the bank’s latest trends lending report it said there was an increase of demand for buy-to-let lending over the summer, reflecting rising rental yields. In each region of the UK the price of rent increased in September 2011, an average of £718 per month – in London £1,029, this is from the latest LSL property services buy-to-let index. The director of broker prolific mortgage finance, Lea Karasavvas, says: “We are having sealed bids with buy-to-lets because the rental market is just so strong”.

The average yield for landlords is now 5.3%, up from 5.2% in August, the LSL says. Tenant arrears have now dropped to their lowest level since April 2010, 8.6% of all UK rent was unpaid or late by the end of September this year (2011).

Between April and June £3.5bn worth of buy-to-let loans were taken out, that is 32,000 loans which is the highest number and value since 2008, this is according to the council of mortgage lenders (CML).

“Encouraging news” says Paul Smee, director general. He also said first time buyers were not being displaced by buy-to-let landlords.

But Matt Griffith of first-time buyer campaign site PricedOut, disagrees. He says: “In a market where equity is king, investors are able to outbid first-time buyers for available lower-level properties. In the housing market, equity is nearly always a result of longevity – which gives older homeowners a head-and-shoulders advantage. Housing wealth and ownership is more generationally lopsided than it has been since the 1940s, and we appear to be seeing older groups pressing home their advantage through investment buying.”

The future then isn’t quite so bright for both tenants and first time buyers. They are being pushed out of the market by increasing house prices and more rent being charged by landlords.

President of the ARLA, Tim Hyatt, says: "There is a finite amount of rental property and unless both housing supply and mortgage availability improves, renters will find their options in the market are reduced.

The association of residential lettings agents have said the problem is a lack of supply, the government should also be doing more to encourage landlords. Demand has increased dramatically for properties in London and the South East, and now there may be more tenants than properties.

President of the ARLA, Tim Hyatt, says: “There is a finite amount of rental property and unless both housing supply and mortgage availability improves, renters will find their options in the market are reduced. The government is doing little to encourage landlords to invest in new properties, therefore we are running out of quality stock to offer to tenants. This is reflected in rent increases and a lack of choice for consumers”.

In early October, Greg Clark, the communities and local government minister, said that the private rental sector is “destroying family life”. Also, MP Caroline flint said in a recent Labour party conference that she wanted stronger private tenants rights.

Matt Griffith thinks that if tenure rights were improved, for example longer notice periods for eviction, are more favoured by some landlords because if offers them greater security. It can also make the market more stable. Griffith says: “Stronger tenure rights would help reduce the level of short-term investment flows into the sector as well as improving the experience of the renter, who is steadily getting older and as a result requires stability for children, family and schools,” he says.

Many lenders will only issue buy-to-let property loans on the basis that the property has an assured shorthold tenancy, that means a tenancy can only be for at least 6 months but no more than 12.

“It’s the bankers, not the landlords, to blame here,” Griffith adds. Halifax and Accord Mortgages, for example, both demand that properties be let on an assured shorthold tenancy basis – although some, including Woolwich mortgages, do not”.

Rental Yields have hit 5.3% and as a result of house prices falling outside London, the total returns over the past year fell to 1.8%. This has been pointed out by LSL’s David Newnes as the chances for lenders and borrowers is disappearing.

“Yields are still very low in historical terms” Griffith continues, “further declines in-house prices look likely and tenant arrears have been climbing steeply. Both the later trends may intensify as we move into a very difficult period for UK household income.”

Small lenders this year have been returning to buy-to-let mortgages, but things have changed since the credit crunch hit the UK.

“Borrowing 85% [of a property’s value] was easy pre-credit crunch, and the fees on those loans were a lot lower,” says Lea Karasavvas, director of Prolific Mortgage Finance. “Now charges of £1,999 are not uncommon and borrowers will find little choice above 75% loan to value (LTV)”.

Property funding specialist, Adrian Anderson, has said: “Before the credit crunch there wasn’t a huge difference between residential and buy to let rates.” This is with rates not being as competitive as they used to be.

If landlords have a deposit of at least 40%, a two-year fixed-rate deal is being offered at 3.89% and a fee of £999 by principality building society. But, Woolwich has a lifetime tracker, with a base rate plus 2.98% and a fee of £1,999.

Other banks and lenders have tightened their criteria, Lloyds banking group, which included Birmingham Midshires and Halifax as lenders only allow landlords to take just three loans with them. The minimum rent required with this is still typically 125% of the month cost of repaying the mortgage.

Lloyds Banking Group

We hope you found this information useful. Please remember to use CIA Insurance when you or your family and friends need motorcycle insurance, landlords insurance or commercial insurance.


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