Amateur landlords are being forced out of the market with the latest round of mortgage price hikes.
Many lenders have stopped offering buy-to-let
loans or severely tightened their lending criteria for prospective landlords and many existing landlords, who are approaching the end of their mortgage terms.
The buy-to-let mortgage market is shrinking by the day because providers are becoming increasingly reluctant to lend in the current market. Figures from Hometrack show house prices fell for the seventh consecutive month in April, leading to an annual market fall of 0.9%.
Last week Abbey pulled its entire buy-to-let range, save for an expensive two-year fixed rate deal of 6.99%.
Britain’s biggest group of lenders, HBOS, which owns Halifax, Intelligent Finance, Bank of Scotland and Birmingham Midshires have recently hiked rates and arrangement fees across much of the product range.
Providers are increasingly averse to lending buy-to-let products because the target properties of many amateur landlords are new-build apartment blocks in cities such as Birmingham, Manchester and Liverpool where values are falling fast.
Deposits are all-important
“Many providers are simply not lending against new builds now,” said Lynsey Sweales, director of buy-to-let mortgage broker, The Money Centre.
With tightened lending criteria, a sizeable deposit is more important than ever for buy-to-let investors. “All borrowers need at least a 15%-20% deposit now,” adds Sweales.
It looks like the worse it yet to come and Sweales believes we’ll see more buy-to-let deals pulled from the market or become more expensive. “It’s likely to get worse before it gets better because there’s a huge lack of confidence in the market, but there is opportunity for savvy investors.”
The key for potential investors is to research the local housing market thoroughly to avoid purchasing the wrong type of property. “People have been too tempted by the discounts offered on new builds, but this isn’t the way to go,” explains Sweales. “Make friends with a letting agent and ask what type of property is in demand at the moment. I would go for something like a town or city centre terrace, where there is still likely to be room to negotiate on price.”
There is still a range of buy-to-let deals available but it is advised to speak to an independent mortgage broker to find the best value mortgage deals and prior notice of which products may soon be pulled from the market.
Aside from a deposit, Sweales says it is crucial to build up a reserve cash fund to cover repairs, maintenance and void periods.
“Ultimately, it’s important to remember that property is a long term investment, which you should be looking to hold on to for around 10-15 years,” says Sweales. “The short-term profits we saw before the credit crunch have come to an end but there is still potential.”
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.