Now is the time to buy-to-let
With new lenders and predictions of massive growth, things are looking great for buy-to-let. But is there a sting in the tail?
Everyone’s a landlord these days. My father, an estate agent for his sins, suggested to me at the weekend that he had seen a property he thought I should buy and earn an income from by renting out the spare room. Given that my wife and I have owned our home for just over a year and are still getting used to this homeowner lark, I let him down gently.
Letting out spare rooms is on the rise though. Spareroom.co.uk has suggested record numbers of Brits are now renting out those rooms they don’t use, with listings up 31% in the last quarter.
So a jump in prospective amateur landlords, but what about the professional buy-to-let landlords? There has been talk recently of a bounce in buy-to-let – is it made to last, or just a blip?
The haves and have nots
While, statistically at least, the housing market has shown signs of a recovery over the past year, it’s very much been a tale of the haves and have nots.
Recent question on this topic
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Those who have massive deposits, and those who have not a chance in hell of getting one.
It's like this: so long as you have a decent chunk of cash to devote towards purchasing a property – and we are talking 30% minimum here – then you have pretty much had the choice of the deals. You represent the business that every lender is after.
If you don’t have such a massive deposit, good luck finding a decent mortgage - because you will need it. Not only are deals more expensive, the lenders are more picky in terms of who they will approve. This is the case no matter what sort of mortgage you are after, whether you’re a first-time buyer, a remortgagor or a buy-to-let investor.
Loosening the lending
Until there is less of a divide, no real recovery in the housing market can take place - which is why the fall in house prices isn't actually helping all that many first-time buyers.
Havind said that,lending criteria has started to loosen a little in the residential mortgage market recently, with new higher loan-to-value products launched each month.
But choice and competition is still very restricted in the buy-to-let mortgage arena.
John Fitzsimons highlights three things to consider if you’re planning a buy-to-let investment
However, that may now be changing.
Specialist buy-to-let lender The Mortgage Works (part of the Nationwide group) last week launched a new range of products for landlords at 80% loan-to-value. OK, the deals aren’t exactly irresistible – a one-year fixed at 4.69%, a one-year tracker at 4.69% (BBR + 4.19%), an 18-month fixed at 5.49% and a two-year fixed at 5.99%, all with arrangement fees of 2.5%.
But the important thing is that a lender, and a major one at that, has taken the decision to lower the size of deposit it expects before it will lend. If other lenders follow suit, the flow of funding into the buy-to-let sector may start to really improve.
- Watch this video: Three top tips for wannabe landlords
New market entrants
Further good news came from a new market entrant to the buy-to-let sector, with Kensington launching deals at 75% loan-to-value. The lender, one of the big proponents of specialist lending (sub-prime, self-cert, etc) during the boom years has started making serious moves back into the market again in recent months, and the fact that it sees potential in buy-to-let lending is a real positive for the rental market.
Unsurprisingly though the lender is only interested in experienced landlords, who have at least two properties in their portfolio. It will allow investors to hold up to 10 properties, worth a total of £2m.
The market today....
So why are these lenders looking to increase their involvement in the buy-to-let market? New figures from the Council of Mortgage Lenders, the lender trade body, tell their own story.
The headline statistic is that lending in the sector actually fell in the first quarter of 2010, in terms of both loan numbers (a fall of 15% to 22,000) and the value of lending (by 12% to £2.1bn). The CML put this entirely down to the end of the Stamp Duty holiday.
However, perhaps more interesting is the fact that across the past five quarters, buy-to-let lending has remained effectively flat. With the market looking so stable, the lenders evidently see an opportunity to grab a bit of market share in an area that isn’t quite as risky as its reputation might suggest.
....and the market tomorrow
Indeed, a new report on the buy-to-let market by analyst Datamonitor suggests there is vast room for growth within the next few years.
How to pick the right property, get the right mortgage, take out the right insurance, choose the right letting agent and most importantly, unravel all that red tape!Do this goal
While it highlighted that lending for landlord purchases had effectively fallen off a cliff (the number of products fell 90% between the peak and 2009), it emphasised that the sheer demand for rental property would ensure growth in the private rental market.
It suggested that a stabilisation of house prices would boost investor confidence, as would stable rents, with lending in the market jumping significantly over the coming years. While it forecast gross advances would remain flat this year, Datamonitor argued that it would jump to £15.8bn in 2012, £20.2bn in 2013 and £25.6bn in 2014.
That’s a hell of a jump from the £8.5bn advanced in 2009.
So we have a market where lending has stabilised and is set to grow substantially, with more lenders entering the market and lending at more generous levels, to more potential landlords.
Buy-to-let all seems pretty hunky dory really...
- Adopt this goal: Become a buy-to-let landlord
Here comes the bad news
Despite all of that, there is quite a large bump in the road ahead which threatens to derail any prospective buy-to-let boom.
Related blog post
The new Government has announced that it will be holding its first Budget on 22 June. And in a clear demonstration of this ‘new politics’ that they’ve been banging on about, the first thing they’ve done is exactly what the last few administrations have done – furiously leak and brief the media on what they are planning to announce.
And top of the tree will be changes to Capital Gains Tax. While the tax is currently charged at a flat rate of 18%, it’s likely to be ramped up to a top rate of a whopping 40%. And while the Prime Minister has been quick to emphasise he wants to encourage entrepreneurship, he has also gone on record as saying that investing in second homes is not necessarily very good for the economy.
As a result, plenty of buy-to-let landlords will be starting to panic about just how much they can expect to make when they sell on their portfolios. Maybe things aren’t quite so rosy for buy-to-let after all...
- Read this blog: Should you buy in the UK or overseas?
Tell us what you think
Don't be shy - use the comments box below to tell us what you think the future holds for buy-to-let landlords. Are we headed for another boom or another bust?
At lovemoney.com, you can research all the best deals using our online mortgage service, or speak directly to a whole-of-market, no-fee lovemoney.com broker. Call 0800 804 4045 or email firstname.lastname@example.org for more help.