Is it wise to invest in buy-to-let in the current climate?
Buy-to-let mortgage products have been receiving mixed press recently.
But amid warnings that the credit crunch is forcing lenders to increase mortgage rates on buy-to-let, coupled with a reported drop in demand for rental flats, it would seem that negativity is tipping the scales of the discussion in its favour.
However, there is every reason to remain positive.
Lending
The lending crisis is widespread among consumers, but the extent to which it is effecting banks has only just started to reveal itself.
Bradford & Bingley (B&B) has been the most recent casualty, following Paragon’s announcement that it has been forced to stop lending last month.
Having reduced its standard variable rate mortgage in line with the Bank of England (BoE) cut however, B&B has sold £4.2 billion worth of its buy-to-let products - making up half of all its lending - at a loss of £15 to £40 million.
That said, what does it mean for prospective landlords?
The only real issue with lending for landlords is being able to pay the mortgage, which with the potential for bank rate rises, is still an issue.
And while professionals may be best placed to ride out any short-term periodic mismatch between mortgage payments and rental yields, it is unlikely that - if the credit crisis is to continue or get any worse - buy-to-let will seem like such a good or sustainable investment.
Demand
However, according to a spokesperson for the Association of Residential Lettings Agents (Arla), the problem is “not nearly as dramatic as some people would have it”.
He explained: “It is very much a safe market provided that people take the right advice, they’ve done their sums right and asked local letting agents what the local markets wants.”
So any lending issues on the side of the landlord - that is rate rises - seem capable of being met by demand, which according to the Arla spokesperson is helped by a shortage of housing across the country.
This view is echoed by Property Hawk editor, Chris Horne, who believes that rental demand will actually grow in 2008, because first-time buyers are put-off from making a purchase.
“There’s a dual effect of rising house prices, which prices more potential first-time buyers out of the market - which means they have to rent, and rent for longer than they would have done,” he said.
In addition, he noted that people - particularly first-time buyers - are likely to want to see what happens in the market before committing to a purchase.
“They could, potentially, buy a house cheaper later on,” he added.
One last pitfall
But the demand issue is not quite the silver-lining that landlords might expect.
For although the rises in lending rates actually benefit the landlord despite putting them under financial strain as well, the type of property that is in demand plays an integral role, as research by the Royal Institute of Chartered Surveyors (Rics) reveals.
Only 16.9 per cent of surveyors reported a rise in demand for rental flats, compared to the 36.9 per cent reporting a rise in the previous three months.
Rics noted that this was due to the demand for houses being “much stronger” than the demand for flats, contributing to a drop of 8.5 per cent in the number of surveyors reporting a rise in tenant lettings compared to three months ago.
On balance then, it would seem as if the most important factor in undertaking a buy-to-let mortgage is for landlords to ensure that they do their research first.
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