Buy to Let Mortgages – they’re on the up

The buy-to-let market took a dive last year, but confidence has returned and the market is doing well again. This time last year, no one knew what would happen with the interest rates, but they have remained steady and fears of a property value crash proved to be unfounded. Consequently, landlords have been buying more properties and remortgaging to get the best deals. Rental incomes increased, from October to December 2005, by an average of 3.3. Rental yield, which is income as a percentage of the property’s value, increased over the same time period from 6.42 to 6.45. The Council of Mortgage Lenders (CML) report also adds to the statistics, revealing that the value of new buy-to-let mortgages increased almost 50 in the second half of 2005 compared to the first half of the year, and the number of buy-to-let mortgages arranged also rose, by 39.The boom should last for the duration of 2006 - as long as house prices continue to increase steadily, tenants keep renting, and people are unable to get their first foot on the property ladder, there will be a healthy supply for budding property moguls. Mortgage lenders are enjoying the buy-to-let boom too. They see these mortgages as a better bet than the traditional homeowner mortgages, in fact, based on figures provided by the CML, it would seem that the percentage of arrears in buy-to-let mortgages is beneath that for homeowner mortgages. Also, the arrears on buy-to-let mortgages are lessening while on homeowner mortgages, the arrears are actually growing. Mortgage lenders, to encourage more buy-to-let mortgages, have changed their previously quite strict attitude to these mortgages, and are now making them much more accessible. They are also actively promoting them.Traditionally, buy-to-let lenders have demanded that the monthly rental income should be around one third more than the actual mortgage payments. So if a mortgage cost £500 a month, then the rental income would need to be around £700. But the trend, started by a few mainstream lenders, is heading towards relaxing these criteria. It’s not just the improving risk situation, it’s also a reflection of property prices. House prices have risen quicker than rental income yields over the last six or seven years, making it more difficult for landlords to meet the criteria. The average requirement for rent compared to mortgage is closer to 25 now, but Northern Rock and a few others will provide a buy-to-let mortgage if the monthly rental income simply equals the mortgage payment. The trend is also meaning increases across the board on the percentage of the property’s value lenders are prepared to lend on. In the past, they would lend no more than 75, but recently, the average has increased to almost 85. Notably, Northern Rock will lend up to 87 and GMAC have an 89 deal.It’s all looking good for the buy-to-let market, as interest rates have taken a dive. The Mortgage Trust has a 3-year fixed rate deal at 4.75, and the West Bromwich has a 2-year fixed at 4.79. There’s a 1.5 arrangement fee to pay on both however, so if you recalculate the West Bromwich offer taking into account the extra charges, it’s actually 5.54 over the two year fixed period. Landlords already in the business don’t usually need to worry about the arrangement fees as it is cashflow that keeps the business going. A large upfront fee is soon covered by the rental income, so they would rather take the low interest rate and pay more at the outset. Of course, the rental income/mortgage payment calculations are based on the interest rate, so it gives the landlord more flexibility when it comes to the amount of rental income they must receive to meet the lenders’ income criteria.For those that want to get in on the buy-to-let boom for the first time – don’t go in blindly. Be sure to research the area first, look at the rental levels in the area, the state of property prices, and importantly, the number of properties to rent that are empty. City centres are particularly risky choices as they are in danger of becoming saturated with new flats and apartments. They are also becoming overpriced in some areas. Developers offer cash back and discount schemes to tempt buyers rather than decrease their prices, which deflects people’s attention from the fact that they are overpriced. Lenders will, in these situations, reduce their value to lending ratio back to the old rates, at 75. A golden rule for landlords is always to account for periods when the property is not earning income. If your area does become saturated with rental properties, then you may find it difficult to let your property, and you may also need to lower the rent to stay in with the competition. All worth considering before making a final commitment.

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