Buy to let gets a boost
Competition in the buy-to-let sector has pushed mortgage rates down at a time when residential rates have started to rise.
The increased cost of funding due to the effects of the eurozone crisis has started driving up the price of residential mortgages.
Moneyfacts.co.uk data shows the average price of a residential two-year fixed-rate mortgage has reached its highest level since August last year, at 4.27 per cent. Tracker rates have also risen, with two-year products reaching 3.5 per cent, the highest since October last year when they hit a 16-month peak of 3.58 per cent.
But BTL pricing has continued to fall. The average rate of BTL loans has dropped to 4.79 per cent, from 5 per cent in February last year and 5.3 per cent in February 2010.
Research from BTL brokerage Mortgages for Business shows there are now 25 lenders operating in the BTL sector, with a combined total of 442 products, up on 19 lenders with a total of 298 products a year ago.
Cardiff BTL brokerage TBMC chief executive Andy Young says: “Despite the continuing concerns over the eurozone affecting the wider financial markets, increased competition in the UK buy-to-let mortgage market has helped to keep the pricing of products down.
“The increase in lenders and products is a good sign for residential property investors and, although the mortgage market as a whole is likely to remain flat during 2012, increasing competition among lenders should ensure growth in the buy-to-let sector.”
John Charcol senior technical manager Ray Boulger says lenders are attracted to the higher returns on BTL lending.
He says: “Because rates are around 1.5 per cent higher in the buy-to-let market, the returns are higher, so you can see why lenders would want to come back into this sector, which is driving rates down a bit.”
Rates will eventually rise but brokers are divided on when this will happen.
Boulger says: “We will continue to see more competition in buy to let compared with the residential market, so I would expect the differential pricing to narrow slightly over the next year.”
But Mortgage Concepts Associates director Mike Richards says: “There seems to be a natural increase in rates at the moment because of the rise in the Libor and over the next few months we might see slight increases both in residential and buy-to-let mortgages if this continues.”
Demand for BTL finance is expected to continue to grow this year, especially after the Council of Mortgage Lenders revealed BTL lending in the third quarter of last year reached its highest level since the final quarter of 2008.
This means the sector now accounts for around 12 per cent of all new lending but this is still down from its peak of 19 per cent in the first quarter of 2008.
Apart from lender appetite for BTL, another reason for the increase in lending is the attractive yields on offer to investors.
Young says TBMC’s own research shows the average rental yield increased from 6.15 per cent in the third quarter of 2011 to 6.94 per cent in the fourth.
Paragon Mortgages managing director John Heron says: “I suspect we will continue to see changes in yield patterns and how different regions fair against each other. With demand still at a peak, I believe landlords will continue to achieve healthy yields in the coming months.”
But Buy To Let Funding Services principal Geoff Laird says, in general, lenders are not meeting the needs of professional landlords.
He says: “My biggest gripe is that most lenders have set out their stall to serve the novice landlord instead of established investors. I would have thought lenders would take a more prudent line and lend to a person with a number of properties and who knows what they are doing.”
Some believe rising competition could eventually lead to more innovation from lenders.
Mortgages for Business managing director David Whittaker says: “What you will see is lenders coming round beating their drums and asking for business but the problem is they all have similar products at similar prices.
“I think we will see some of them go away and shuffle their criteria around a bit and we could see a loosening up on criteria, although this will take them a while.”