Buy to Let Mortgages. The market bounces to boom time
After a crisis of confidence last year the buy to let market is booming again. Earlier fears that interest rates were rising and property values could crash are well behind us. So, fuelled by rising confidence and rising rental yields, landlords have been snapping up new properties and swapping to cheaper mortgage deals.
On average, rental incomes increased by 3.3% in the three months to January whilst income as a percentage of the property’s value – the rental yield – edged up to 6.45% from 6.42%. The latest report from the Council of Mortgage Lenders (CML) shows that the number of buy to let mortgages increase by 39% in the second half of 2005 over the preceding six months whilst the value of these mortgages rose by 47%.
Indeed, with expectations of steady increases in house prices, a glut of cheaper buy to let deals and a healthy demand from tenants, especially the first time buyers who remain priced out off the property ladder, we expect the boom to extend throughout 2006.
And mortgage lenders are happier too! Industry figures show that buy-to-let mortgages have become a safer bet than homeowner mortgages. According to the CML, the percentage of buy-to-let mortgage in arrears is now lower than the figure for homeowner mortgages - and the arrears trend for buy-to-let is downwards whist it’s upwards for homeowners.
The mortgage lenders have responded by relaxing some of their lending criteria and promoting aggressively again.
Historically, buy-to-let lenders have wanted monthly rental income to exceed 130% of mortgage payments – so if the mortgage was costing £1,000 per month, the rental value needs to exceed £1,300. But now several lenders have relaxed this criteria. The reason’s not just the market’s lower risk profile. Over the last five years house prices have risen faster than rental income yields, making it more difficult for landlords to meet the 130% criteria. So now the lending average is closer to 125% whilst Northern Rock is happy to lend where the income simply equals the mortgage payment.
At the same time we have seen a trend for lenders to increase the percentage of the property value they will lend. Whilst 75% used to be the top level, the average is now 85% with Northern Rock lending up to 87% and GMAC stretching to 89%.
Buy-to-let interest rates have fallen too. 4.79% is available from the West Bromwich Building Society for a two year fixed rate whereas 4.75% is available from the Mortgage Trust on a three-year fix - but both these deals incur a 1.5% arrangement fee. In the case of the West Bromwich deal, when you recalculate the interest rate including the fee and amortising the fee over two years, the equivalent rate rises to 5.54%.
Arrangement fees should not be a headache for landlords whose prime concern is cash flow. It’s worth paying a large fee to obtain a low headline interest rate. It’s because the rental income/mortgage payment calculation is based on the headline interest rate thus reducing the rental that has to be charged in order to meet the lenders lending criteria.
If you are interested in joining the buy-to-let boom, remember to do your homework. Research your local market thoroughly. Look at rental values, trends in property prices and levels of un-let properties.
And be aware that some lenders are becoming concerned at the buy-to-let market in city centres. Many large cities now have a glut of new flats and apartments which can also be overpriced. Developers are responding by offering enticing cash back and discount schemes rather than reducing prices. Lenders are responding by reducing the value to lending ratio back to 75%.
It also worthwhile remembering that it’s important to know how much you can afford to pay for the mortgage each month factoring in for the inevitable periods when the property is empty.
