Buy to let mortgage market rises again

Landlord Expert
By Landlord Expert November 25, 2010 20:26

The history

The rise and fall of the buy-to-let landlord seems to have been linked in with the housing boom and crash.

As banks began to see the folly of their inappropriate lending and tightened their lending criteria after the credit crunch, so the amount and quality of buy-to-let mortgages on the market fell. In fact the number of buy-to-let mortgages fell by 95 per cent from 2007 to 2010.

A further result of lending to investors who did not have much of a deposit is that many buy-to-let investors could not afford the repayments, but for investors who have planned for the long term, the market is looking very healthy now.

Why many people in the UK have to rent

Many potential homeowners are finding it extremely difficult to raise the necessary deposit to get a mortgage and this is unlikely to change in the next 18 months. The UK faces a period of higher costs and rising unemployment so it seems very likely that rental demand will continue to increase, as it has throughout 2010. This means the amount that landlords can charge for rent will go up as the demand for rental properties increases.

However, landlords have not been exempt from the difficulties of borrowing money for a mortgage. As with other sectors of the mortgage market, landlords have had to stump up higher deposits as loan to equity ratios have been slashed and the number of products available to buy-to-let investors has fallen.

Fewer empty properties

A positive sign for landlords is that the period a property stands empty has fallen. According to the Association of Residential Letting Agents, the average period a rental property is left unoccupied has fallen to just 3.2 weeks. This is another indicator that demand for rental property is going up.

Higher rents

This leads to the next factor in the improved market for buy-to-let landlords. Most surveyors are reporting that more landlords received higher rents in July than in the first six months of the year and tenant demand has increased in all regions of the UK, especially London and the east of England.

Lack of choice

However, the last two years have seen a massive reduction in buy-to-let mortgages, though this has been rising in the past year. According to Moneyfacts, a comparison website, there are now 306 mortgages available to landlords compared to 3,648 at the peak of the housing boom in July 2007.

However, the number of mortgages available for those with a relatively low deposit of 20 per cent has risen in the last year from just four in October 2009 to 12 in October 2010. It is a similar story for landlords with a 25 per cent deposit where the amount of buy-to-let mortgages available has increased from 65 to 99 in the last year. This will mean that more landlords can obtain a mortgage.

Lack of supply

Another factor that is pushing up rental yields for landlords is the lack of supply of affordable housing. James Moss, managing director of leading buying agent Curzon Investment Property, says: "The main reason we're destined to stay a nation of renters is that government promises to unlock the mortgage market and build more homes have been broken."

This is bad news for renters but provides a positive outlook for landlords who can expect rental income to continue to rise for the foreseeable future.

High fees

In addition to the lack of mortgage options available, high product fees that lenders are charging landlords has been a factor in the decline of buy-to-let mortgages. Product fees of 3.5 per cent of the amount borrowed are common, although in recent months some lenders have began to offer lower fees or mortgages with no fees at all.

However, you need to check carefully because many of the no-fee products charge higher rates so it is important to establish the overall cost and then compare to find the best deal you can.

Use comparison site to find the best buy-to-let mortgage for you.

How much deposit is required?

To get the best deals on the market you really need 40 per cent equity or deposit on the property. There are also good deals if you have 30 per cent equity and as mentioned above, a few more deals are now available if you have 20 or 25 per cent deposit.

The best fixed-rate deals

There are some good deals on the market but it depends on the future of interest rates as to whether these will improve or represent the best you will be able to get. If the Bank of England base rate stays at 0.5 per cent there is scope for mortgages in the buy-to-let market to improve but if and when base rate rises then so will the rates on these types of mortgages.

Let's take a look at the best fixed-rate deals currently on the market.

Two-year fixed-rate deals

The best deals available for a two-year fixed-rate deal are provided by The Mortgage Works. If you only need to borrow 60 per cent of the property value you can get a deal at 3.99 per cent, though this does incur a 3.5 per cent fee. The best option for those with a lower deposit also comes from The Mortgage Works at 5.19 per cent, again with a fee of 3.5 per cent.

Three-year fixed rate deals

The Post Office and Nottinghamshire Building Society come in with the best options for a three-year fix. These deals are available if you have a 25 per cent deposit and both have the same rate of 5.29 per cent and the same fee of £1,495.

Five-year fixed rate deals

Leeds Building Society come out best for this option with a five-year fixed rate deal at 5.69 per cent if you have a 40 per cent deposit and a fee of £1,549. The Post Office provide the best deal to borrow 75 per cent of the value of your property with a competitive rate of 5.89 per cent and a fee of £1,495. The Mortgage Works offer a slightly lower rate of 5.79 per cent but the fee is 3.5 per cent which will work out more expensive than the Post Office product unless you are buying a very cheap property.

The best deals on tracker mortgages

The Principality Building Society has a two-year tracker mortgage at 3.74 per cent - base rate at 0.5 per cent, plus 3.24 per cent - if you have a 40 per cent deposit with a three per cent fee. The Mortgage Works offer the best deal if you need to borrow up to 70 per cent. Its rate for a two-year tracker is 3.99 per cent - base rate plus 3.49 per cent - and the fee is 3.5 per cent of the amount you borrow.

The Bank of China UK has a term tracker available for potential landlords who have a 25 per cent deposit to put down. The rate is 3.88 per cent - base rate plus 3.38 per cent - and the fee is £1,695. The best variable two-year tracker deal for those with a 25 per cent deposit comes from The Mortgage Works with a rate of 4.19 per cent - base rate plus 3.69 per cent - and has a fee of 3.5 per cent.

So, the overall outlook for buy-to-let investors is improving. More products are coming to the market, mortgage rates are very low and the market for rental income is growing and looks unlikely to decline over the next two years.

Landlord Expert
By Landlord Expert November 25, 2010 20:26

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