Buy-to-let booms despite mortgage squeeze

Property values are depressed and tenant demand strong, so is this the right moment for investors? Sarah Davidson reports
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The Independent Online

It's hard to call a surge of activity in such a subdued economy a frenzy but as far as success stories go in 2012, buy-to-let is one to watch.

Mortgage lenders, still cautious about lending to residential borrowers, are stepping up their efforts in the investment side of residential property. And more finance means more opportunities for would-be landlords.

David Whittaker, a director at buy-to-let specialist Mortgages for Business, says this year is set to be a good one. "Buy-to-let is one of the few segments of the mortgage market that is really flourishing and investors are seeing strong returns," he says. "Yields on buy-to-let are much stronger than in other asset classes, which is tempting an increasing number of investors into the market."

Research suggests at the end of last year investors were seeing yields of 6.1 per cent on so-called "vanilla" buy-to-let, semi-commercial yields of 7.8 per cent, and for complex investments with multiple tenants, yields were pushing 9.9 per cent. Mr Whittaker adds that with lenders keeping a tight grip on residential mortgage finance the backlog of buyers confined to the rental sector has pushed demand for rented property "astronomically high", supporting rents.

On a national basis LSL Property Services, which owns estate agents Your Move and Reeds Rains, said rents rose 4 per cent in 2011 and experts say regional "hot spots" could see an uplift of around 5 per cent this year. On a monthly basis LSL says rents are starting to plateau.

Meanwhile, lenders are piling back into buy-to-let because low interest rates, depressed property values and strong tenant demand make the perfect storm for investors. In the past fortnight Santander has cut rates on its just-launched buy-to-let products, Co-operative Bank has committed to lend £600m in the sector and Paragon Mortgages, the specialist buy-to-let lender, has launched 50 new deals for professional landlords.

Rightmove's Miles Shipside says there are nearly three times more buy-to-let mortgage products available than two years ago. "With low yields on most alternative investments, 2012 is potentially a good year for investor landlords to expand their portfolios," he claims.

Mortgage rates on low loan-to-value buy-to-lets start from around 2.94 per cent for a straightforward deal and for landlords with less cash to splash more options are opening up. Leeds and Aldermore have both launched deals for those with a 20 per cent deposit in the past two weeks joining The Mortgage Works – part of Nationwide – and Kent Reliance. Rates for 80 per cent LTV deals are much higher but, advisers suggest, still represent good value. They tend to start around 5.69 per cent and fees range from £199 to £1,999.

Hugh Wade-Jones, a director of mortgage broker Enness Private Clients, says some lenders are also becoming more flexible on how they assess investors applying for a mortgage – moving to a balance of rental income guarantee and personal income. "Some lenders are stating rates and criteria improved for people earning above a certain level," he explains.

It is worth remembering that buy-to-let is a commercial investment decision and the experts warn that you must do your research properly.

Rents and tenant demand vary locally affecting the likelihood and length of void periods. Local unemployment and cuts in public spending can also impact on tenants' ability to pay and LSL research shows 10.7 per cent of all rent was either late or unpaid at the end of last year.

John Heron, the managing director of Paragon, explains: "Buy-to-let is not an investment in the normal meaning of the word. It is a commercial activity regardless of whether you have one or 100 properties.

"If you are new to buy-to-let, get financial advice, join a landlord association and get accredited."

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