What does the Future Hold for Buy to Let?

by Angus Ryan

10:52 AM, 19th December 2011
About 8 years ago

What does the Future Hold for Buy to Let?

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What does the Future Hold for Buy to Let?

Why Property?

Over the last 30 years UK property prices have achieved average compound growth of approximately 10% each year for all areas and all dwellings. Property investment is not a quick get rich scheme but most futures are made with time, not timing! It is a manageable asset which you can control; you can see it and touch it. With property you can look forward to both positive cash flow and capital growth. I would say that the next property boom will take place in at least 10 years time. This is a well populated, relatively small country and there are many more households being created than new houses being built meaning demand for houses will push house prices upwards in the future. I think the rental market ‘explosion’ is imminent.

A recent online survey of 8,000 British prospective homeowners aged between 20 and 45 revealed that almost two thirds believed that their prospects of ever buying their own home are virtually nil. The rising cost of property, strict lending criteria and the inability for non-homeowners to save for a deposit has made it extremely difficult to consider purchasing a property. If you are considering buying property to let or thinking of starting a letting agency, now is a good to time to put your plans into action!

Mortgage Finance

The availability of mortgage finance has hindered landlords from increasing their portfolios over the last couple of years, unless you have a war chest or have a lot of equity in your existing portfolio. If you can get mortgage finance then it will be expensive with 2.5 – 3.5% arrangement fees being the norm now unless you have a 25% deposit. However, there are signs that things are getting slowly better. Other specialist lenders such as Paragon are back in the market and offering competitive rates up to 80% LTV. I think in the foreseeable future there will be more availability, albeit expensive.

Lenders are trying to replenish their balance sheets after the financial crisis. Interest rates are a lot higher than residential mortgages typically between 5 and 6%. The BTL mortgage market is not regulated like the residential market, so hopefully landlords will continue to be able to take out interest only mortgages as this is the most tax efficient way to invest. Keep in touch with the market and contact a good specialist mortgage broker who is not just tied to a few lenders but is ‘whole of market’ so that you are in a position to act quickly if you see a bargain! Moneyfacts will give you a comparison of BTL mortgages. The National Landlord Association also has a good free online BTL mortgage search facility which all private landlords can use.

Watch out for brokers who charge fees though, I recently got stung for £2k for an aborted purchase. Look at your intended broker’s terms and conditions carefully before you sign anything and make sure you understand what you are paying for. This broker charged me £140 per hour which is even more than some solicitors! Brokers usually get their fees when an offer of finance is made and not on completion. My transaction was a bit more complicated than usual and I used a specialist broker but I was shocked at the final bill.

You may like to check out the National Landlord Association where you can get a cashback if you take out a mortgage through them. Some brokers charge about £250 for researching the market and getting you a mortgage offer to suit your circumstances. You pay for what you get at the end of the day.

Another good source for quick funds is to find out which credit card providers can arrange balance transfers into your current account. These are called ‘Money Transfers’ and currently with MBNA credit card I can get 95% of my credit limit transferred into my current account at an interest rate of 0.9% for 12 months, plus a 4% handling fee. This facility might come in handy if you discover a good deal.

Rental Demand

This will continue to be very strong as nationally there are not enough new houses/flats being built for the number of new households being created. There are many social housing tenants waiting to be housed which the Local Authority cannot cope with so they will be looking more and more to the private rented sector.

First-time buyers are finding it increasingly difficult to get on the property ladder with high prices compared to their income and bigger deposits required by the lenders (at least 20%). A whole generation may miss the opportunity to buy a property as the average age is now 36 years of age!
A secure job for life is now a thing of the past so there is more contract and temporary work on offer. I always find it interesting when we get to the New Year as there always seems to be more tenant activity. Potential and existing tenants seem to move around a lot more at this time with new resolutions and unfortunate break up of relationships.

Interest Rates

They are set to remain low for the foreseeable future. There is only one way they are going to move in the future and that is of course upwards but only in small amounts, I expect it will not go above 1.5-2% for several years. The UK economy is very fragile and needs a lot more time to get out of the doldrums. The next couple of years or so will see growing unemployment, rising costs and government spending cuts. This is good news for existing landlords who have SVR or tracker mortgages and it is also good for investment as you can expect to get deals for mortgages at interest rates of 4-5%.

Property Opportunities

It is a great time to buy and to look for opportunities with a forecast of bleak economic times ahead. 2011 and 2012 will see rising unemployment, spending cuts, rising costs and people will feel the pinch and be less prosperous. In my local area I am finding there are more repossessions and more motivated buyers. It is a buyer’s market so go to your local estate agents and put your name on their lists. It is a good time to invest for many reasons such as –

  1. Low Interest Rates and strong rental demand
  2. Lack of Finance hinders FTB’s getting into the market
  3. Massive market uncertainty
  4. Plenty of Motivated Sellers and not many buyers

I think property prices will remain stable but there will be plenty of opportunities to buy in the New Year. So get hunting!



Comments

Tony Atkins

6:29 AM, 20th December 2011
About 8 years ago

In the south of England or any area where house prices remain very high relative to incomes, I believe BTL is only worth doing if you have a lot of spare capital, strong control over your personal finances and main mortgage, and are looking for a better and less risky return than is available by other investment routes.

If you need a mortgage of 75-80%, it seems to me you are undertaking a risky and unrewarding venture over a ten-year timeframe: even with modestly rising rents your gross returns are unlikely to exceed 6%, yet you're paying 5-5.5% on your mortgage plus 2-3% fees upfront, plus maintenance costs (advertising, gas inspections, wear and tear, all subject to inflation), and you will be heavily exposed when interest rates rise or house prices fall or you get a non-paying tenant. All you will be doing is acting as an intermediary for most of the tenant's rent to go straight to a mortgage company! Far better to keep your capital in reserve in a safer vehicle, and if you must invest in property, look instead at renovations to add value rather than straight passive rental.

However, if you are lucky enough to be able to buy for cash or with a very small mortgage, the returns appear good: where else can you get 6% on a cash investment, plus the chance of capital gain? You could try high-yielding shares like Glaxo or BP and there is a strong argument that many companies are generating strong profits at the moment (which they're not investing due to all the uncertainty), whilst their shares are on low P/E multiples and likely to grow strongly over the next 10 years after a wasted decade since the year 2000.

However many people dislike the stock market compared to bricks and mortar: they feel at the mercy of global economic forces and unable to change events through their own efforts, whereas there is often potential to invest and upgrade or extend with a property. What about bonds? If you're approaching retirement and spend, say, £200K on an annuity, you are unlikely to get more than 3.5% for an index-linked pension. If you spend the same £200K on a rental property, you can get 6% roughly linked to earnings, plus the capital remains in your estate or can be gifted to your children or a trust.

It may seem paradoxical that a BTL investment can look so poor for someone with a large mortgage, but so good for someone with cash, but this just shows the fat profits currently being made by banks on mortgages and the poor returns offered on savings accounts and over-bought bonds.

Mark Alexander

7:29 AM, 20th December 2011
About 8 years ago

Hi Tony

In areas where 6% yields are the norm I agree with you. Norwich, my home town, is one of those areas. There are, however, several areas where 10% plus yields are achievable but these are areas with long term capital growth issues due to unemployment etc. London has the lowest yields and the highest capital growth whereas HMO's in the North have the highest yields and the lowest growth prospects. As always it's a matter of balancing portfolio's for people who choose to invest in property.

11:31 AM, 20th December 2011
About 8 years ago

I'm taking advantage of the fact that the "Lack of Finance hinders FTB’s getting into the market". I'm buying houses on behalf of FTBs where they pay me 10K upfront and rent the property from me for around 12 months. Then they pay me the rest of the fees plus a profit that we negotiate. All these are added to the purchase price and becomes the new purchase price. They now have a right-to-buy within 12 months.

In the meantime, I get extra rental profits on top of the agreed profit margin. Everyone's happy especially the tenant-buyer who now has a fixed price so that they can save up for the new mortgage.

FTBs have to rent while they're saving the deposit. So, why not rent the house they're going to buy in the first place. Such tenants look after the property as if it's their own from day 1.

Glenn Ackroyd

21:43 PM, 20th December 2011
About 8 years ago

In the recent publication of the Mortgage Market Review (MMR), the FSA anticipate that capital growth will be curtailed by around 12% over the next 10 years. This is because tighter restrictions in lending will lead to fewer mortgages being granted and in turn acting as a dampener on prices.

The good news is that they still predict over 30% growth over the next 10 years.

Anybody in property should regard capital growth as the icing on the cake - the real prize being cashflow/yield.

However, holding property over the very long term will inevitably provide for growth due to inflationary pressure.


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