Page last updated at 23:14 GMT, Tuesday, 3 June 2008 00:14 UK

What now for buy-to-let?

Money Talk
By Jonathan Moore
Mortgages for Business

Jonathan Moore

There seems to be little good news in the property market of late, with tales of doom and gloom abounding.

It appears that the credit crunch is affecting all corners of society - and those who own or invest in property have been hit hardest.

On the face of it, the buy-to-let market appears to have been hit particularly hard.

Just seven months ago, investors had the pick of thousands of buy-to-let investment products.

Now there are 73% fewer as many lenders have removed themselves from the market entirely.

Lenders are withdrawing investment products from first-time investors and are now asking for much higher deposits.

And buy-to-let mortgage rates have hit the psychological 6% mark.

But when you scratch below the surface, there are some encouraging signs that the market will continue to be successful for many landlords.

For instance, investors are reporting much higher rents and increasing demand for rented accommodation.

So what is happening in the buy-to-let market and are there still opportunities for investors?

Mortgage availability

The buy-to-let market has long been dominated by specialist securitised lenders, who borrowed money from the money markets to meet product demand, and niche lenders who were owned and funded by the larger financial institutions.

Lenders are deliberately positioning their loans to attract just those 'prime' borrowers

As inter-bank lending dried up over concerns of bank liquidity, many securitised lenders have had to withdraw their products.

Many may wish to re-enter the buy-to-let market, but funds remain difficult to come by.

The niche lenders owned by the larger financial institutions have received only limited funds from the parent companies, pushing up interest rates and making lending criteria tougher.

Despite the government's injection of 50bn into the financial markets, Libor (the interest rate on which many mortgages are priced) remains at more than 0.75% above the Bank of England's base rate.

Libor is the rate at which banks lend to each other.

It has traditionally mirrored the base rate, but has risen sharply as a result of bank liquidity concerns.

Buy-to-let lenders have responded with sharply increased lending rates, with very few mortgage products under the 6% mark.

Whereas just a few months ago, it may have been possible to secure a buy-to-let mortgage with just a 15% deposit, most lenders now demand between 20% and 30%.

We are also starting to see differentiated loan-to-value pricing, with those investors with a smaller deposit having to choose a mortgage with a more expensive headline rate or larger arrangement fee.

By making these moves, lenders are deliberately positioning their loans to attract just those "prime" borrowers, eliminating those who they deem to be risky.

First-time investors

Lenders have for some time managed their risk portfolio.

City centre apartments and new builds are one such example.

Lenders have removed themselves from this market entirely over the past 24 months due to over-supply, falling rents and questionable valuations from developers.

They are now increasingly viewing new buy-to-let investors as risky and are pricing them out of the market.

Lenders are seeking those portfolio investors who can demonstrate an understanding of the market and who have a good track record.

It is possible for first-time investors to invest in property, but they should expect to pay a premium and must be able to bring a sizeable deposit.

Those wishing to remortgage property may also find it difficult, particularly if the property has been newly built or renovated within the past 12 months.

Again lenders will demand sizeable deposits and borrowers will struggle to get competitive rates.


It is important, however, not to judge the whole buy-to-let market by lenders' reluctance to lend to new investors and on new builds - or, indeed, by the reduced number of mortgage products available.

The market currently favours larger investors

Established properties catering for families, houses of high multiple occupancy (HMOs) and flats above commercial premises all continue to provide a good return or yield.

The Royal Institution of Chartered Surveyors is reporting a 29% rise in letting instructions in the three months to the end of April 2008, and the Association of Residential Letting Agents is reporting a 4% increase in rents.

One reason is that first-time buyers are struggling to find a foot on the property ladder and are resorting to rented accommodation.

The market currently favours larger investors, and those with cash in the bank are able to snap up competitively valued homes and build up their portfolio.

Many of the gimmicks, such as property seminars and investment clubs, may have disappeared.

But our overriding advice remains - compare property rents and valuations in the area you are buying, and make sure you research the local property market thoroughly.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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