Buy To Let Mortgage News

In this month’s The Last Word, I want to highlight some viewpoints and feedback about the buy to let market and indeed raise some issues and considerations that should be at the forefront of landlords’ minds, including interest rates, confidence in the market, rent costs and rental yields.

Some research we carried out recently has revealed that despite ongoing interest rate rises, confidence amongst investors in the buy to let market is set to continue, with 90% of respondents intending on expanding their property portfolios this year. As the UK’s largest specialist buy to let broker, this can only be good news for our business, as well as those investors looking to make money across the buy to let market as a whole. The research also found that only a very small percentage of landlords, 5%, have any intention of selling property this year, proving that property remains a very popular long term investment. Though this insight highlights buoyancy in the market, there are other considerations that landlords and would-be landlords must be aware of.

As many buy to let investors are coming to the end of their three year fixed rate mortgages and therefore in need of remortgaging on to new deals, such a move is likely to force them to increase the rent on the properties they own to be in line with the increase in base rate, from 4% three years ago, to 5.25% now, though this is likely to be higher still given this weeks’ further expected rise. We have found that this steady increase will mean that some landlords will increase rent on their properties, to ensure they are not left covering any shortfall between mortgage payments and rent received, by pushing this increased cost onto their tenants. In some cases and areas, landlords may even increase rents beyond the level needed to cover the mortgage, to allow them to turn a profit, build a fund to pay for future repairs, or indeed pay for any under-performing properties on landlords’ portfolios.

When it comes to rental yields, we have seen that the current situation is a continuation of the trend that has been ongoing over the last several years – that of a gradual downward spiral. While the property epicentre of London has dipped only fractionally, across the UK another story is being told. Scotland has seen the largest drop, falling almost a whole percent, while less dramatic declines were seen across England.

The situation of slowly sinking rental yields can be attributed to high house price growth and relatively static rents. However, we believe this will change over the course of 2007 due to market conditions such as ongoing lack of good rental accommodation and increasing customer demand. With these factors going a long way to reverse the fall, this could yet see Q4 2007 being the best quarter for rental yields this year.

In addition to the fall in rental yields, the gap between yields available on newly purchased properties and remortgaged investments in England and London has reached its lowest level yet. Traditionally, buy-to-let investors will purchase a property in need of renovation, undertake the work and then remortgage it for a higher value. This generally causes the yields post-remortgage to fall, as while the renovations do add value and make it easier to rent the property, they are not necessarily reflected in significantly higher rents.

What this means is that though yields are falling, it is not necessarily bad news for investors, as it can be attributed to healthy capital appreciation rather than any fall in rents and with this in mind, we believe that we will see healthy rental growth in 2007 that may cause us to witness increases in rental yields later on this year.

However, the narrowing gap between rental yields available on newly purchased properties and remortgaged investments is particularly interesting. We believe that this trend is developing as more and more investors choose to purchase new build properties rather than ‘second hand’ investments, and in doing so, open themselves up to the risk of borrowing more than they can afford, in light of increasing interest rates. A glut of new build properties in some cities means that there is a much wider choice for tenants, and some landlords are likely to have expensive empty properties.

This is very worrying as many new investors fail to realise that with a buy-to-let investment, you only get back what you are prepared to put in. An investor who purchases a ‘second hand’ property and does minor renovations will see the value increase. This will provide them with additional equity to purchase further investments or simply a cushion against market fluctuations.

Investors really do need to avoid the new build trap and make sure that their investment provides them with the opportunity to add value.



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