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The long good buy to let

Despite observations that the buy-to-let market is cooling, latest

figures from the Council of Mortgage Lenders point to the contrary.

With interest rates at a record low and equities at their lowest

levels since the 1974 oil crisis, property is being seen as the best

investment. The Bank of England&#39s recent decision to reduce interest

rates to 3.75 per cent can only fuel this trend, so it is perhaps

unsurprising that demand for buy-to-let mortgages appears to be

riding out the economic storm.

So why the concern? True, buy to let is by no means without its

pitfalls and there are concerns over the way that lenders base their

decisions to lend on rental income, which has not risen in line with

house prices. It is difficult to borrow high loan to value

percentages because the estimated rental income is being downvalued.

Many investors have moved out of equities and bought second or third

houses, highlighting a need for regulation of the market. The boom

has created a surplus of rental properties and therefore a renters&#39

market. This is worrying because large numbers of inexperienced

consumers are continuing to invest in properties with little

know-ledge or experience of the financial risks they are taking.

Consumers considering buy to let as an investment opportunity must

understand the potential returns or lack of them, the tax position,

financial liability should they run into problems with a tenant and

whether self-management outweighs the pros and cons of using an

agent. Location should also be a key consideration, given that the

housing market has reportedly overheated in certain parts of London

and the South. It is critical to ensure that inexperienced investors

have access to all the facts before making a decision.

But while it would seem that the buy-to-let bubble may burst, with

monthly mortgage payments potentially outweighing monthly rental

income, if we are to look at property as a real alternative to

investing in equities, we should really be looking at the long-term

nature of the product. How many equity products reap dividends


Let us do the (albeit crude) maths. Suppose that the total costs of

owning a second property worth £100,000 equate to £700 a

month, then assume that the rental value of the property is £500

a month. On the face of it, the landlord loses £200 a month or

£2,400 over a year. Over 25 years, this amounts to a

£60,000 loss.

But once we factor in a very modest house price increase of, say, 5

per cent a year, we can expect the property to be worth around

£350,000 in 25 years time. Taking away the £60,000 cost

over 25 years, this leaves a profit of £290,000 – and that is

before you account for any annual increase in rental value. Even if

the investment is not necessarily self-financing, it is likely that

capital growth will make the deal attractive.

Investing in property just requires a change of mindset away from

expecting an immediate return. If a customer was to put away

£200 a month into a long-term savings bond, they would not view

this as a monthly loss, would they? Many would argue that house

prices are a far more reliable investment than equities anyway over a

long period.

While falling rental values mean that buy-to-let properties are not

necessarily offering a quick buck, IFAs may well advise that property

is a good alternative long-term investment – at least while equity

markets are failing to deliver.

Ironically, the mortgage market has traditionally been viewed by IFAs

as too much hard work compared with the equity market. But by

entering the buy-to-let arena, IFAs could find themselves sandwiched

between willing lenders offering attractive products and keen


England has one of the slowest homebuying and selling processes in

Europe, largely because of problems in communicating the information

that must be gathered before exchanging contracts on a house purchase.

A key area where an IFA can make a difference is at the mortgage

offer stage of an application. Research shows that once a mortgage

offer has been received, a customer is unlikely to pursue offers from

other lenders. The quicker the conversion from application to offer

can be made, the higher the lender&#39s customer acquisition rate is

likely to be.

The main barrier to turning around mortgage offers is that lenders

are bogged down by age-old processes and systems. This has been

highlighted in the recent Sandler report. Contrary to perception, an

overhaul of all IT systems is not necessary. Improvements can be made

one small incremental step at a time, without detracting from the

core business of lending to a buoyant market.

If the mortgage market becomes easier for IFAs to work in, we should

see a scenario where IFAs decide to complement their equity

businesses by becoming property investment specialists.

Perhaps they might even forge relationships with local estate agents

or with lenders&#39 repossession departments and approach their

higher-net-worth clients with buy-to-let properties worth investing


What is clear is that some finetuning will help IFAs and lenders

improve customer service and position property as an increasingly

attractive alternative investment.


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