Latest News 20th July 2007

Buy to let market – Tougher conditions ahead in the UK

The supply of homes in the UK is already falling short of demand. This problem is set to get worse with an anticipated need of a further 2,000,000 homes over the next 20 years. This makes investment in the UK property market very attractive with a current buoyant rental market and fantastic growth potential in the value of properties. However, despite the attractive conditions and prospects, the latest interest rise makes accessing an 85% loan to value mortgage extremely difficult.

As property prices have been steadily increasing for many years, it has become more difficult to make buy to let mortgages fit the lenders criteria. The particular criteria that most investors try to honour is having a realistic and achievable rental 25% higher than the mortgage payment on any particular property. There are 3 prime factors affecting this criteria –

• The property value. Clearly, the higher the value of the property, the more money it will cost per month to service the mortgage.
• The achievable rent. This varies considerably across the UK, influenced by the demand and the ability of the tenant to pay.
• The interest rate. Clearly, the lower interest rates make purchasing buy to let properties more achievable, because the monthly mortgage costs are less, therefore the rental requirement is less.

For 5 years the interest rates have been historically low, meaning that it was not too difficult to make the monthly rent fit the criteria. Over the last 5 years the UK has witnessed steady growth in property prices, which has been gradually making the achievement of a rent income of 25% more than the mortgage cost increasingly difficult to achieve. To compound an already difficult set of circumstances with rising property prices, and rentals not rising so quickly, we have also experienced 5 Bank of England base rate increases.

It has been possible to overcome these increasingly difficult conditions as a result of many lenders holding down their mortgage rates on a wide selection of mortgage products. As we all expected with the UK base rate now 5.75% and many buy to let mortgage products still available below 5%, it was inevitable that the lenders would start raising their mortgage rates. Since the last Bank of England base rate increase to 5.75%, we have seen almost all of the buy to let mortgage providers swift to increase their rates. As I write there are only 3 mortgages currently offered below 5%.

With all 3 factors now working against the investor, this will inevitably mean it will become very difficult and increasingly impossible to make the standard 85% loan to value mortgage stack up, particularly when there is total dependency on rental income. The consequence will be more affordability based buy to let mortgages, this is were the investors personal income can be included in the rental calculation. We will probably see over the course of the next 2 - 3 months see builders and private sellers reducing their prices to a level where the buy to let mortgage calculations fit.

Arguably this should become a good negotiating tool. To have impact in negotiating, the investor needs to get quotes from their broker which should demonstrate that at the current asking price for the property, the figures simply do not stack up. You will need a second quote showing the maximum price you can pay for the property. The figures will speak for themselves. When asking the seller, particularly a builder with many properties, I will usually offer to buy several properties rather than one, which can often sway the decision making and what started as a potential purchase going nowhere, can result in a better than expected price you finally pay for the properties.