Buy-to-let glory days may soon be over
Sunday 11 November 2012
The number of landlords snapping up rental properties continues to increase, according to new figures. But is a buy-to-let bubble looming on the horizon?
Investors hoping to cash in on a dream combination of rising rents and falling house prices took out 34,400 buy-to-let loans over the summer, 2 per cent more than in the previous quarter.
It means the value of buy-to-let lending in the first nine months of 2012 was £11.8bn, 19 per cent higher than the same period in 2011, according to the Council of Mortgage Lenders.
David Whittaker, the managing director of broker Mortgages for Business, says: "Landlords are the big winners in the current market.
"Lending to homeowners is still 4 per cent lower than last year, leaving demand for rented accommodation undiminished. This continues to push up rents and keeps first-time buyers locked out of the market."
The average rent hit a new high of £741 a month in September, 3.2 per cent higher than the year before, according to LSL Property Services. But sky-high rents have inevitably led to more tenants defaulting on their payments.
More than 9 per cent of rent was late or unpaid in September, and LSL estimates there are currently 99,000 tenants who have not paid their rent for the past two months, the highest number since their records began in 2008.
So how long can rents go on increasing? Ed Stansfield, a property economist at Capital Economics, thinks it can't be much longer.
"Rents already appear to be at or close to the limit of what households can afford, given the squeeze on real incomes," he says, expecting rents to soon flatline. But if rents start to fall, and even worse, interest rates start to rise, this could seriously erode a landlord's return.
Another worry is further house price falls. This week Halifax said prices have dropped 1.7 per cent in the past year and many economists expect prices to continue to drift down this winter.
While landlords should always see buy-to-let as a long term investment, house price falls still present a problem because the equity in their property is eroded which makes it harder to access the best mortgage deals, Mr Stansfield warns. "With house prices likely to fall further, prospective returns for new landlords do not look particularly good," he adds.
The note of caution makes it even more important for landlords to do their sums carefully before joining the buy-to-let brigade. The most important calculation for landlords is the yield, that is, the total amount of rent, minus any mortgage payments and running costs, divided by the property cost.
Mortgage for Business says that yields have been steadily rising, with the average return increasing from 6.1 per cent to 6.7 per cent this year, but crucially this doesn't take into account running costs. Choosing the right property, finding reputable tenants, and securing a competitive mortgage deal remains key to a successful buy-to-let. However, the best mortgage rates are for those with the biggest deposits and many buy-to-let deals have expensive fees.
Current options include NatWest's two-year fixed rate of 3.49 per cent with a £1,999 fee for those with a 40 per cent deposit. Or, for a variable deal tracking the base rate, Principality building society is offering 2.89 per cent for those with a 40 per cent deposit, though it comes with a hefty 2.5 per cent arrangement fee.
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