A brief Mindful Money guide to buy-to-let (with best buy table)
- 23 May 2014
Demand to rent has soared by 14% in the year to April 2014, with availability of rental property only increasing by 1% according to the Sequence National Lettings Index. So does it make sense to buy-to-let? Consumer and money journalist Jill Insley looks at the issues.
The result, says Stephen Nation, head of Lettings for Sequence, the agency network which produces the index, has been a sharp increase in rents, up by 10% on average across the UK over 12 months and 2% in March alone.
“New agreed tenancies continue to climb, 20% annually and 4% on the month, as the appetite to rent is not slowing and rising rents prove to be no mood dampener,” he says.
The government’s Help to Buy scheme, which some thought might help to reduce demand for rental property slightly, has simply resulted in another benefit for landlords – capital gains in the form of rising house prices.
Buy to let also proved a steady performer during the recession, with rental yields easily outstripping the interest paid on savings accounts. And it could become a whole lot more popular next year thanks to the impending relaxation of pension rules which will give investors much more freedom over how they use their pension pot.
So for investors with ready capital, is now the time to buy – before competition for suitable rental property hots up even more?
That, says Oliver Atkinson of Urban Sales & Lettings, depends on where you intend to buy. He owns rental properties himself, and says he would only buy in London and its commuter belt, where demand has been much stronger than the rest of the country. According to the Sequence Index, new London tenancies have rocketed by 41% annually, the biggest rise on record, while the availability of property has dropped by 2%.
But at the same time property prices in the Capital and the South East have also risen sharply, making it harder for potential landlords to get a decent yield from any property they buy now.
While house prices have gone up by 8% across the UK as a whole in the last year, the rise is just 4.7% if you exclude London and the South East, where prices have shot up by 17%.
For this reason, despite all the positive news about rent, Atkinson urges caution. “I don’t think I would invest right now – not for the next three to six months,” he says. “I think we are quite close to that fine line between bubble and burst in London and the South East, as salaries cannot sustain price increases at this rate. Something will happen – fears about interest rate rises or more properties coming onto the market – to cause a calming of the market.”
Know your market
Before you go house shopping, it’s imperative to know who your target tenant is and to check there is actually demand in the area you are proposing to buy.
There is steady demand from tenants on housing benefit, but caps on the amount of benefit they can claim, and the fact the benefit is paid to the tenant rather than directly to the landlord, has made this market less attractive to private landlords in the last couple of years.
Student digs might sound a sure purchase in university towns but could involve potential trashing of the property and annoyance to neighbours. In addition, some houses with multiple occupation must be licenced – generally if they have three or more storeys and are occupied by five or more people forming two or more households. You can find out more about the rules on the gov.uk website (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/9429/322463.pdf)
For people new to buy to let, Atkinson suggests choosing for a higher quality property in a good area to attract professional tenants who will take care of their accommodation.
“You might be attracted by the idea of potential capital gains from three flats costing £100,000 rather than putting all your money into one better quality property costing £300,000,” he says. “But it’s a gamble and you will be giving yourself three times the headache in terms of management.”
Other things you need to consider
Do you want to manage the property yourself – possibly fielding calls about broken down boiler and leaking pipes at all hours of the day and night, or pay for an agency to do the managing for you?
will you need access to your money at short notice? Property is an illiquid investment – even in London where properties are being snapped up within days of going on sale, it will still take about three months for a sale to complete
can you cope financially with void periods, when the property is not let?
have you enough set aside to pay the added extras? As well as the normal conveyancing and stamp duty costs, you will need to buy specialist buildings insurance and the fees of buy to let mortgages can be hefty – often more than 2.5% of the loan’s value.
Financing your buy to let
Most people take out interest only mortgages to fund the purchase of their buy to let property, says David Hollingworth of mortgage broker London & Country.
“The vast majority of deals are for a 75% loan to value ratio, but the amount amount you can borrow also depends on the rental income,” he says. “Typically you need to earn rent equivalent to 125% of the mortgage interest, but that may not be calculated using the mortgage rate you are opting for – the lender could use its standard variable rate or some other rate.”
The sale of most buy to let mortgages is not regulated by the Financial Conduct Authority, so borrowers are not subject to the same stringent questionnaires about affordability or stress testing (checking that borrowers can still afford their mortgage payments if interest rates rise). But remember that interest rates are expected to start rising in the next 12 months, so it’s wise to make sure you can afford payments if the rate goes up by several percentage points.
Parents who are buying a property for their children to share with other paying tenants will find their mortgages subject to regulation.
Hollingworth says: “Many lenders have pulled out of this particular niche market since the Mortgage Market Review and more stringent affordability tests. Virgin Money and a few of the smaller building societies will still offer buy to let loans to parents, but the size of the loan will be linked to the parents’ income, not the rent they expect to earn on the property.”
Current buy to let rates on offer
|Natwest||2.25%||Base +1.75% until 31/10/16||£1,995||60%||Until 31/10/16||Free valuation & legal work for remortgages|
|Leeds||2.89%||Fixed until 31/07/16||£999||60%||Until 31/07/16|
|Coventry||3.55%||Variable for term||£999||75%||None||Free valuation. Free legal work for remortgages|
|Skipton||3.69%||Fixed until 31/08/17||£995||70%||Until 31/08/17||Free valuation & legal work for remortgages|
|Yorkshire Bank||4.99%||Fixed until 31/08/19||£999||80%||Until 31/08/19|
Source: L&C – 0800 373300 / lcplc.co.uk
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