| last years crisis of confidence the buy-to-let market is | | | | Simultaneously we have seen a trend for lenders to |
| again booming. Earlier worries that interest rates were | | | | increase the percentage of the property's value they |
| on the up and property values would crash are firmly | | | | will lend on. Whilst 75% used to be the maximum level, |
| behind us. So, fuelled by rising rental yields confidence, | | | | the average is now closer to 85% with Northern Rock |
| landlords have been snapping up new properties and | | | | lending up to 87% and GMAC being prepared to |
| remortgaging for cheaper deals. | | | | stretch to 89%. |
| In the final three months of last year, rental incomes | | | | Interest rates on buy-to-let have also fallen. 4.75% is |
| increased by an average of 3.3%. At the same time | | | | available from the Mortgage Trust on a three-year fix |
| the rental yield, income as a percentage of the | | | | whilst 4.79% is available from the West Bromwich |
| property's value, edged up from 6.42% to 6.45%. The | | | | Building Society fixed for a two years. Both these |
| latest report from the Council of Mortgage Lenders | | | | deals incur a 1.5% arrangement fee. On the West |
| (CML) also shows that the value of new buy-to-let | | | | Bromwich deal, when you recalculate the interest rate |
| mortgages increase by 47% in the second half of | | | | and include the arrangement fee amortised over two |
| 2005 over the preceding six months whilst the number | | | | years, the equivalent rate rises to 5.54%. |
| of these mortgages rose by 39%. | | | | Arrangement fees should not necessarily be a |
| Indeed, we expect the boom to extend throughout | | | | problem for landlords whose prime concern is cash |
| 2006. It will be powered by the steady increases in | | | | flow. For these landlords it can be worth paying a large |
| house prices, a healthy demand from tenants, | | | | fee to obtain a low headline interest rate. That's |
| especially the first time buyers who remain priced out | | | | because the rental income/mortgage payment |
| off the property ladder and a glut of cheaper buy to | | | | calculation is based on the headline interest rate and |
| let deals. | | | | this reduces the rental that has to be charged in order |
| Mortgage lenders are happy as well! Industry figures | | | | to meet the lenders income criteria. |
| show that buy-to-let mortgages are now a safer bet | | | | If you're interested in joining the buy-to-let boom, |
| for them than homeowner mortgages. According to | | | | remember to do your homework. Carefully research |
| the CML, percentage of arrears in buy-to-let mortgage | | | | the local rental market - look at the rentals being |
| is now lower than that for homeowner mortgages - | | | | achieved, the trends in property prices and levels of |
| and the arrears trend for buy-to-let is improving whist | | | | vacant to let properties. |
| for homeowners it's getting worse. | | | | And be especially careful especially if you're |
| Not surprisingly, the mortgage lenders have responded | | | | considering a city centre. Some lenders are becoming |
| by relaxing some of their lending criteria and | | | | concerned at the potential oversupply of new flats and |
| aggressively promoting buy-to-let again. | | | | apartments in city centres they believe are becoming |
| In the past, buy-to-let lenders have required monthly | | | | overpriced. Developers are responding by offering |
| rental income to exceed mortgage payments by 30% | | | | tempting cash back and discount schemes rather than |
| – so if a mortgage was costing £750 per | | | | reducing prices. But this can sometimes serves to |
| month, the rental income needed to exceed | | | | mask the problem of over pricing. Realising this for |
| £975. But now several lenders have relaxed this | | | | some cities, lenders are reducing the value to lending |
| criteria. The reason's not just the improved risk profile. | | | | ratio back to 75%. |
| Over the last six or seven years, house prices have | | | | Also remember that it's important to budget for the |
| risen faster than rental income yields, making it | | | | inevitable periods when the property is empty. In an |
| increasingly difficult for landlords to meet the +30% | | | | essentially demand and supply market, if the rental |
| criteria. So now the lending average is closer to +25% | | | | market in your area becomes oversupplied you could |
| although Northern Rock and a few others are happy | | | | be hit by lengthy vacancies or be forced to reduce |
| to lend where the income simply equals the mortgage | | | | your rental prices. |
| payment. | | | | |