Buy-to-let keeps the housing blues at bay
Landlords seem untroubled by the market slide, so Laura Howard asks if new investors should cross the threshold
Sunday 27 April 2008
Whether or not to jump on board the buy-to-let bandwagon has been a big question for homeowners since the turn of the millennium. During the property boom, thousands of ordinary people morphed into property millionaires seemingly in the blink of an eye, while the less brave just talked about doing it a million times instead.
But now falling house prices, rising mortgage costs and the bleak economic outlook have provided just the excuse that the risk-averse camp was waiting for. Buy-to-let has finally, as they said it might, come to grief. Actually, it's not that simple. According to the Royal Institution of Chartered Surveyors (Rics), just 2 per cent of landlords plan to sell up when their current tenants' leases expire. That's no more than usual and hardly represents a market that is in freefall.
And this small proportion can be viewed in the context of the new capital gains tax regime, says Martin Taylor, partner at accountants HW Fisher. "The rate of CGT is now a flat 18 per cent as opposed to the previous minimum rate of 24 per cent for a higher-rate tax payer, which is advantageous to landlords who decide to sell."
It's not the case either that landlords are being forced to hand back the keys. According to official figures from the Council of Mortgage Lenders, repossessions in the buy-to-let arena accounted for just 0.12 per cent of all homes repossesed during the fourth quarter of last year.
In fact, British landlords are barely breaking into a sweat. "Our customers are not worried about falling house prices – they are making use of them to buy more property with enhanced negotiating power," says Lynsey Sweales, director at buy-to-let specialist The Money Centre. "They have experience in the field, owning an average of 7.2 properties each, which means they have an adequate financial cushion."
And because of the dwindling confidence in the housing market, rents are rising. According to the latest buy-to-let index from lender Paragon, average monthly rents reached a new peak of £990 in February – up from £967 the previous month. "This should increase further still because while fewer people can buy, the same number want their independence," says Andrew Montlake, partner at broker Cobalt Capital.
Perhaps, then, the debate over whether to enter buy-to-let is as finely balanced as before – it just has a new twist. "First-time investors can get clever in this market," says Ms Sweales. "Estate agents are feeling the pinch, so go and make contact. Ask about properties that have been on the market for a while so you are in a good position to negotiate on price. But first it's crucial to speak with lettings agents in the area about the types of home that rent well."
But for many novice landlords, funding could be a problem. Financial analyst Moneyfacts says there were 884 separate buy-to-let mortgages up for grabs on 3 April – that has since dwindled to 621. And it will be harder to qualify for these deals, explains Mr Montlake. "Buy-to-let lenders now typically require a 25 per cent deposit, while interest rates are also higher at between 6 and 7 per cent."
Lenders will also need reassurance that the rent generated from the property will outweigh the interest on the mortgage. During the boom, borrowers would have to prove the rent would cover 100 per cent of interest repayments; now that figure tends to be between 115 and 120 per cent.
But, as ever, for those with plenty of cash, there are some decent offers around. BM Solutions, for example, has a deal fixed at 5.79 per cent for three years providing you can put down a 25 per cent deposit and manage "rent to interest" cover of 125 per cent.
Investors looking to make their debut in buy-to-let by bagging a cheap property from a distressed seller will also encounter problems with lenders. At one time, if you could buy a house valued at £100,000 for £80,000, this difference would act like the 20 per cent deposit. Now you will have to put down a deposit based on the purchase price regardless.
Even trying to save a buck at a property auction comes with dangers, says Phil Akilade, director at buy-to-let specialist The Diverse Finance Company. "You are required to put down a 10 per cent deposit on the spot at auction to secure the home and must then complete in 28 days. And not only is funding in the market tighter than ever, it is changing all the time. So while you may have a mortgage approved in principle, the deal could be pulled during those 28 days. If this happened, you could be left with no means to fund the property and so potentially lose your deposit."
And if your auction bid goes smoothly, make sure it's not because you are buying a property that no one else wants. "New-build apartments, for example, are being viewed very suspiciously by lenders," says Mr Akilade. "There is a glut of two-bed flats in Manchester, Leeds and Birmingham that can't be sold or rented for love nor money."
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