It is going to be a great year for buy-to let landlords but choosing the right location will be the key to success. With significant regional variations in house prices, landlords must not be tempted to simply buy a property close to where they live for convenience.
Stagnant house prices and increasing demand from tenants could provide a good opportunity for landlords. Many potential first-time buyers are unable to get into the housing market, meaning demand for rented properties is high, so would-be landlords with plenty of capital have the chance to snap up a bargain.
Potential landlords need to understand the risks. The last housing boom saw more than a million people become landlords as they sought to cash in on rising prices. Many lost substantial sums when house prices slumped.
Bath and north-east Somerset have seen an increase of house prices of more than 8 per cent over the last 12 months, while west Devon, Chiltern, south Cambridge-shire and south Bucks saw increases of more than 5 per cent. London, Islington, Camden, Kensington and Chelsea have seen increases of more than 10 per cent, according to Savills/Land Registry figures.
Prices in some areas are close to 2007 peaks while others have fallen sharply.
Landlords need to focus on the regular income they receive from their property rather than the gains of house-price rises but if both benefits can be achieved by smart landlords who buy in the right areas, a real killing can be made.
House prices have now fallen five times in seven months, according to Nationwide Building Society. This, coupled with the uncertain economic outlook, will keep many buyers on the sidelines. These factors should make property increasingly attractive and could signal a move towards BTL by cash-rich investors.
However, I suspect regional variations will continue and there will still be some horror stories from landlords who put all their eggs in one basket and suffer from a depressed local property market. Professional landlords are increasingly spreading their risk and focusing on key areas that look promising in the medium term.
The availability of attractive BTL deals will play a key role in an investor’s decision as to whether to expand their portfolio, as will a potential increase in interest rates. My view is that interest rates will rise and it is a case of when, so investors need to factor this in.
Those brokers who have taken their businesses up market and focused on high net-worth investors are weathering the storm better. This is not surprising as the wealthier have a much higher pain threshold and can cope with a drop in income in percentage terms much better than an average earner.
Let’s not forget that house prices doubled over the last decade, even after taking recent falls and the illusory uplift of inflation into account, according to Halifax research. I dare say we will enjoy similar growth over the next 10 years. The key difference is that only braver investors will act on this likely outcome now.
Those investors with cash in the bank who can put down the necessary deposits should be reaching for their chequebooks - but only after they have done their geography homework.
Sally Laker is managing director of Mortgage Intelligence and Mortgage Next
HOME IN ON BUY-TO-LET DEALS
The number of buy-to-let loans has dwindled in the past few years
Saturday February 12,2011
By Holly Thomas
MORTGAGES for buy-to-let investors are becoming more accessible say experts as a flurry of new deals and lenders come to the market.
The number of buy-to-let loans has dwindled in the past few years as the rental market has shrunk in the wake of the credit crunch.
Even if a landlord wanted to remortgage it has been extremely difficult to do so because loan-to-value (LTV) lending ratios are much lower, fees are high and rental criteria is tough.
Last week, Kensington launched a new deal that allows landlords to borrow 85 per cent LTV at 5.99 per cent for two years with a 2.5 per cent fee.
Melanie Bien, of mortgage broker Private Finance, says: “You haven’t been able to get 85 per cent mortgages on buy-to-let properties since the credit crunch kicked off. The rates offered by Kensington aren’t market leading but you can’t have everything.”
Yorkshire Building Society has announced plans to offer buy-to-let loans in the spring.
New deals from Santander are also expected after it pledged last year to enter the buy-to-let market.
The more choice for landlords the better, particularly when interest rates start rising and they need to remortgage.
David Hollingworth, of London & Country Mortgages, says: “The flurry of new deals will stem from the fact that rental income is standing up well and the signs are that this should continue as first-time buyers continue to struggle to get on the ladder due to heavy deposit requirements.
“More competition in the market should open up more options for landlords, new and existing. “
Hollingworth says existing landlords looking for a new deal still need to factor in all their costs.
The buy to let market saw modest growth last year and with mortgage criteria still constraining the owner-occupier market it seems tenant demand is set to remain high.
According to the Council of Motgage Lenders (CML), in the fourth quarter of 2010 there were 28,600 new buy-to-let loans advanced, worth £3 billion. This was a rise of 6% by volume and 7% by value from the third quarter.
The CML expects stong rental demand to remain in 2011, driven particularly by continuing deposit constraints for those trying to enter the owner-occupier market, still very much hitting first time buyers.
CML director Michael Coogan commented “Funding remains a key constraint on growth in buy-to-let lending, but demand seems to be resilient and loan performance has improved.
Looking ahead, loan performance could potentially be adversely affected by rising rent arrears or interest rate rises, but at present there is no indication of these pressures materialising in practice.
There is also a strong counterbalancing growth influence on the buy to let market, as tenant demand seems set to remain high in the face of continuing deposit constraints to entering the owner-occupier market.”
MoneyHighStreet.com comment: We recently saw some positive news for this market as Kensington announced a new range of buy to let mortgages with rates from 5.24% and a maiximum of 85% LTV.
Royal Bank of Scotland Group / Natwest have announced the creation of a new £100m franchise fund, which could potentially finance up to 1800 new franchise businesses.
The new fund, which has a 1% arrangement fee, could also lead to the creation of 24,000 new jobs according the bank, based on each franchise employing around 13 staff members.
Further incentives for potential franchisees include 12 month capital repayment holidays, and two years' free banking as you'd expect.
Peter Ibbetson, chairman of small business at NatWest and RBS, said:
“Everybody wants to see banks funding business growth, as well as helping new businesses get off the ground to create jobs – this is exactly what this fund will deliver. The industry has shown itself to be virtually recession-proof, so for the many people left out of work by the recession franchising is a great way to start up a business – plus they get the support of a big brand behind them.”
The franchise industry appears to be in good health - the turnover of the industry rose to £11.8bn in 2009, an increase of £400m on 2008, according to a survey by Natwest and the British Franchise Association.
The number of women franchisees has also risen by over 80% over the past seven years.
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