Buy To Let Borrowers


Neil Simpson is a former Personal Finance Journalist of the Year and the author of the Buy-to-Let Investor column in Financial Mail on Sunday. He is a keen property investor and writes about buy-to-let online as well as for a variety of publications including City AM.

For thousands of knife-edge buy-to-let borrowers the next mortgage rate cut can’t come soon enough. But when will it come – and how big will it be?

Six months ago most commentators were predicting that rates would rise this autumn, going from 5.75 to 6 or even a worst-case 6.25 per cent. What a difference a credit crunch and a good old-fashioned banking crisis can make. In the post-Northern Rock world everyone is now predicting a rate cut. Some have suggested we could get it in December, though last set of inflation figures make that unlikely. I reckon January won’t play either, because the Monetary Policy Committee will want more time to see the Christmas and New Year trading patterns before deciding which way the wind should be blowing.

So the first Thursday in February is the date to watch – and lots of experts say we could get two more rate cuts by the end of 2008. This will bring interest-only payments on a typical £120,000 buy-to-let loan down by a healthy £75 a month. With a bit of luck any recent investors who are struggling to balance their books now will then be able to cope – especially as the increased demand from tenants that always comes when the property market looks uncertain should help push up rents as well. But here’s a worry.

Seeing the Bank of England cut official interest rates is one thing. Getting the benefit from a mortgage lender is quite another. Obviously anyone on a fixed rate won’t see the changes. But borrowers with trackers, discount or other variable rate deals might be in for a disappointment as well. First of all you can bet that any cuts will take a long time coming through. We might all be predicting a February rate cut now, in late November. But you can rely on the fact that if it comes then the lenders will all feign surprise and say they need time to consider their response. Research from financial statistics firm Moneyfacts shows that the response time is getting slower by the year. Some lenders took more than a month to change their rates last time the Bank of England acted. And the announcements they finally made didn’t come into play for several more weeks.

So a February rate cut may not produce any cash savings until March or even April. Just as likely is the fact that lenders won’t pass on the full Bank of England reduction to their customers. If the bank announces a 0.25 per cent cut then mainstream residential customers might get, say, 0.2 per cent reductions. Buy-to-let investors may get less – say 0.15 per cent. You don’t need to be a rocket scientist to see what’s going on. The lenders want to claw back some of the losses their whiz kids made in the credit markets. So they’ll slap the ‘sub prime’ label on anything but the most stable owner occupier loan. They will say they need to toughen rates to ensure they don’t do a Northern Rock (or possibly even a Paragon Mortgages) themselves. Buy-to-let investors are easy targets for the sub prime tag. Everyone hates us, and no-body cares, to paraphrase Millwall supporters. Though I’m ready to lead a chorus of disapproval if we get particularly badly treated next spring.

Ultimately what I think it all means is that a lot of buy-to-let balance sheets might not improve as much as we all hope in 2008. Relying on a falling mortgage bill next year might be a bad idea – not least because anything from an oil to a currency crisis could turn latest predictions on their head and bring the rate pessimists back to the fore. The only good news is that tenant demand is likely to stay strong for much of the country. And if you’re in a new build, buy-to-let ghetto where it’s weak then hopefully this final fact will cheer you up. An independent financial adviser just gave me a quote for a personal pension. I wanted to know how much I would need to save to earn £900 a month when I’m 60 – I picked the figure as the equivalent rent on a north London flat I’ve got my eye on. The answer didn’t come easily - it was all wrapped up in the jargon and small print which always seems like one more reason to pick property over pensions.

But when I finally found the bottom line it seemed I need to pay in just over £400 a month to a pension. That should produce a fund that gives me my £900 a month – though the fund itself if off limits. I can’t cash it in or leave it to anyone in my will, apparently – a bit of a disadvantage compared to my little north London flat.

Now, before the financial advisers accuse me of over-simplifying things I know that comparing property and pensions is never an exact science. But as long as I’m never subsidising a property by more than £400 a month then I reckon bricks and mortar will still come out on top over the next few decades. A rate cut or two next year will just be the icing on the cake.