Buy To Let Market
Gaynor Pengelly is a business and travel journalist who writes for The Mail on Sunday, Independent, CityAM, Yorkshire Post and various glossy magazines. Previously, Gaynor worked as business travel editor at The Mail on Sunday and was also interviewer on The Mail on Sunday’s Rich Report, a glossy dossier on Britain's wealthy. In 2000 she was nominated for a British Press Award.
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Is buy to let bonanza over?
FOR several weeks now my husband I have been wondering whether we’ve missed the buy to let boat.
Two years ago, after the birth of our baby, we downsized to an apartment and paid off our mortgage, knowing that one-day we would climb back on to the property ladder and rent out our pied et terre.
That time has now come but with interest rates edging up and property costs increasing, we are unsure whether this is the right time to be dipping our toes into the buy to let market?
The good news is that despite warnings of a buy-to-let downturn, Britain’s love affair with bricks and mortar is showing no signs of waning.
While it's not quite the hot potato it once was, experts predict a solid future for buy-to-let and even though the days of soaring short-term capital-growth have gone, many believe over the long-term, investors can still benefit
“Now is as good a time as any to get into buy-to-let as long as you do your research, says Melanie Bien, director at independent mortgage broker Savills Private Finance:
“Although house price growth is slowing in some areas of the country, in the long term you are likely to see capital appreciation. Rental yields are stronger in some areas than others so you may not see a massive income but many experienced investors are happy as long as the property pays for itself because they are in it for longer-term capital appreciation to bolster their pensions.”
“There are careful considerations to be made before entering the market,” says David Stubbs, Economist at the Royal Institute of Chartered Surveyors. ”Am I going to be able to rent my property at a decent rate? What will happen if the property sits empty for a month or two? Does my town have special appeal? Am I in a commuter belt that has good transport? Where are the good schools for young families? Where do the students want to live? If those considerations are met then buy to let remains a good and lucrative investment.”
“Do not be tempted to stretch yourself financially warns David Hollingworth of mortgage brokers London & Country, he says: “It’s worth bearing in mind that even in popular areas properties can sit empty. Always factor in that a property can be left empty for two months of the year – this provides a buffer zone. Also Homes often need repairing and things can go wrong. If you do not have enough money in the bank to cover a major repair to your property, do not invest yet.
According to the Royal Institution of Chartered Surveyors, demand for rental homes has reached a nine-year high. And experts predict this will continue as an increasing number of people prefer the flexibility of renting. However, a cooling off of house prices by the end of the year, could bite into landlords’ profits.
“I wouldn’t expect it to fall off the end of a cliff. But the good run in the housing market has been going for a long time and the Bank of England has been trying to slow things down, says Neville Richardson, chief executive of Britannic building society.
But if house-price growth is set to slow it will have an impact on capital appreciation, which many landlords rely on to make profits. Experts warn they should be careful where they buy.
“Buying the right type of property in the right location is key, says: Pierre Williams, Head of Communications for Instant Access Properties Ltd: “Areas which are seeing infrastructure improvements and those in attractive and exclusive locations will always be in demand.”
“Inevitably, with the softening of the market after years of massive growth, pessimists abound but capital growth earnings and rental yields remain strong, adds Williams: “Buy-to-let remains a very successful and rapidly growing investment vehicle for both professional and amateur investors.
Savill’s Melanie Bien says: 'A growing trend for amateur landlords is to get into buy-to-let by renting out their existing property and buying another to move into. The advantage of this is that they may well have built up considerable equity in their existing home, which they can release when they remortgage onto a let-to-buy product and use as a deposit towards their new home.
“They also know the area their existing home is in, and whether it will be attractive to prospective renters, plus the property is likely to be in a good condition so they may not have to do much work to bring it up to scratch for tenants. The added advantage of keeping the property rather than selling it is that the owner hopes to benefit from the appreciation in house prices going forward.”
“Before you take the plunge sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get, adds: London & Country’s David Hollingworth: “Traditionally buy-to-let lenders want rent to cover 125% of the mortgage repayments, although some are relaxing this, and interest rates are higher. Most also look for a 15% deposit, which protects against falling prices. “
And there is no shortage of mortgage companies willing to lend money. In a bid to continue to attract new landlords lenders have relaxed lending criteria, traditionally including maximum 80% loan-to-value and requirements that rent must be 125% mortgage repayments.
Research by financial comparison service eMoneyfacts.co.uk shows that in 1999 the average maximum loan-to-value was 75%, by the end of 2006 this had risen to 85%.
'Six months ago, buy-to-let products to 90% loan-to-value were very few and far between, says: Alan Harper, senior analyst at eMoneyfacts:
“This year, in February alone, Alliance & Leicester, Bank of Ireland, Freedom Lending and Platform have all launched new products to 90%.'
And despite the tougher market, figures suggest landlords are not getting into difficulty. According to the Council of Mortgage Lenders arrears on buy-to-let mortgages fell to 0.59% at the end of 2006 – lower than the mortgage market as a whole.
“Contrary to popular belief, the average buy to let investor is not a twentysomething with little savings, buying a dozen flats on a massive mortgage, says RICS’s David Stubbs: “This market is made up primarily of financially savvy, mature investors in their 40’s who are not going to panic-sell over the next couple of years, but are looking to hold on to their properties for at least a decade.
“They are not highly leveraged; they are not loaded up with debt and they are not walking a knife-edge. Buy-to-let investors are a lot more sober, solid and stable than they are given credit for.
“This, coupled with a huge short fall in housing where demand is outstripping supply, will keep the market performing. Until the Government sorts out this problem, there is no reason for house prices to stop rising, let alone fall, adds Stubbs.
“Some experts are warning of a crash, but they have been saying that for years, says David Hollingworth: “People have had their faith in equities shaken but property has remained a good, solid investment.
“While there may be a down turn, and even a levelling off, it is unlikely to have a big effect on buy to let.
“The key is not to put all your eggs in one basket, adds Hollingworth: “If you are looking at buy to let as you sole pension, you could be in trouble. If you are approaching retirement and there is a property crash, you stand to lose everything.
“If you are prepared to take a long term view on buy to let, not over-stretch yourself financially and put extra money aside for a pension, buy to let remains a very good proposition.”
