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!

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