View more on these topics

What next for BTL?

Buy to let has surged in the last decade but rising interest rates and inflation could be putting the squeeze on landlords. Samantha Downes gauges opinion on whether the market’s success will continue.

The buy-to-let boom of the past decade is one of the mortgage industry’s success stories. According to BTL specialist Paragon, almost a quarter of all new mortgages are taken out by residential property investors.

Alliance & Leicester head of specialist mortgages Jeremy Claridge says low inflation, historically low interest rates and less restric- tive tenancy agreements have all helped fuel buy to let.

He says: “In turn, lenders have become more confident in the buy-to-let sector and you have more and more providers offering lower loan to value buy-to-let mortgages. It has all helped make buy-to-let an acceptable, safe investment.”
But with both interest rates and inflation rising, there are signs that landlords are being squeezed.

In the three months ending April, landlords starting raising rents, a reaction to the fourth interest rate rise in less than a year.

Paragon says rents on a typical buy-to-let property rose by 6.5 per cent in the first three months of the year from an average of £9,942 a year to £10,591.

Chief executive Nigel Terrington says there is still enough demand to keep buy to let going, if not growing.
He says: “Research has shown that over 12 per cent of people already investing in a buy- to-let portfolio were going to invest in more buy-to-let property.”

Terrington says investors do not perceive rising borrowing costs as negative and that most buy-to-let investors are fairly savvy.

He says: “The majority of our landlords are not exposed to short-term interest rate fluctuations as more than 70 per cent of our recent buy-to-let borrowers chose fixed-rate products. Our experience shows that landlords finance their property holdings through a combination of equity and debt typically in the ratio 35 per cent cash, 65 per cent borrowing and this mitigates the impact of rising interest rates.”

Judienne Wood, lettings director at estate and letting agent Kinleigh Folkard & Hayward, says buy to let is flourishing in the cities, with investors in London in particular insured against the effect of rate rises. She says the capital’s standing as an international business centre means that there will always be demand for rental properties.
Wood says that with property prices in London continuing to grow, an increasing number of couples with two flats will keep one as an investment, sell one and then move into a jointly owned property.

She says: “As a result, today, the London residential lettings market is largely fuelled by the buy-to-let landlord, not the professional landlord, bricks and mortar is not their main source of income. This type of investor represents roughly 70 per cent of our business.”

Wood admits there may be some drop- off, however. “The majority of buy-to-let landlords still have a short-term view and there are many fickle investors who will sell quickly, therefore maximising their finan- cial gain, although this type of investor is unlikely to come out of the buy-to-let market and will often reinvest in different areas, not necessarily where they live.”

Co-operative Bank mortgage product manager Dave Lowe says while first-time buyers remain priced out, buy to let will flourish.

Lowe says: “Buy to let continues to meet a particular need. Property is still seen as a good investment and an increasing number of people need somewhere to live. They either cannot afford a mortgage themselves or require more flexible living arrangements.”

Claridge says younger people are actively choosing not to buy and at the same time, a big number of migrants are coming to work in the UK will make buy to let a good future bet.
He says: “There is far more social mobil- ity now. There is also a large number of people returning to education who may need to rent as well as increase in number of single households.”

Claridge says properties bought, espec- ially in the UK’s major cities, still suffer from low rental voids.

He says the typical buy-to-let investor is borrowing around 70 per cent and is using property as an alternative to other methods of saving such as a pension or a stockmarket-linked vehicle. “They are taking a long term view,” he says.
But Premier Mortgage Service managing director John Malone is predicting the end of the buy-to-let boom.

He says: “I am not against buy to let, having myself been involved in the design of buy-to-let products, but I feel what has happened has completely overturned the dynamics of the housing market.

“You only have to go to Manchester, Glasgow or Birmingham to see how many properties bought by buy-to-let investors that are standing empty. There is the demand for properties, especially among those coming to work over here from Eastern Europe, but what they are doing is cramming themselves into one property to save money.”

Malone says a whole generation of 20 and 30-somethings are unable to get on the property ladder.

He says: “People do want flexibility but what they want more is security. You can buy a property and move if you change jobs. Most young people do want to own homes.”

Malone says the whole market cannot be sustained by buy-to-let investors. “Buy to let has inflated house prices singlehandedly, making it even worse for first-time buyers, who cannot afford to get on the property ladder. What will happen when all the migrants go back, as they will when their home countries begin to flourish and when they want to buy property and find the UK too expensive?”

Malone says lenders and buy-to-let borrowers have a moral obligation to change the current situation. He says: “You are getting a two-tier system and as soon as first-time buyers stop getting on the property ladder, those further up the chain will suffer. I have written to Gordon Brown asking that he impose an extra stamp duty on buy-to-let investors. It is the only way to correct what has happened and let some of our key workers exercise their right to buy a home.”

Recommended

HSBC fund steps into private equity

HSBC’s OpenFunds global return fund has diversified into private equity by taking a small holding in Pantheon International Participations, an investment trust that also takes a fund of funds’ approach.

Brain filters aim to help on adverse loans

Mortgage Brain has launched an enhanced adverse and buy to let sourcing module on its Premier Edition sourcing system.The firm, which offers sourcing, point of sale, compliance and electronic trading systems, has set up its premier system, including filters designed to source non-conforming products, covering county court judgments, individual voluntary arrangements and bankruptcies.Enhanced features include […]

Hip providers consider legal action after delay

The Association of Home Information Pack Providers is considering taking legal action against the Royal Institution of Chartered Surveyors over its part in the home information packs debacle.Ahipp deputy director general Paul Broadhead says if it pursues legal action over the Government’s delaying of Hips, it would be against RICS rather than the Government. He […]

‘Use new media to sell pensions to young people’

The pension industry has been told it must use its imagination and find different ways to persuade the younger generation to start saving for retirement.Speaking at the MM Retirement Planning Summit in Nice last week, advisers said the industry is missing a trick by not harnessing new media such as the internet to communicate with […]

Apple: a stellar technology story

By Ali Unwin, head of technology sector research

Apple recently announced the highest-ever recorded quarterly net profit ($18bn), with the sale of 74.4 million iPhones helping the company deliver $74.6bn of revenue for the quarter ending December 2014. These sales were largely driven by strong demand for the new iPhone 6 and iPhone 6 Plus. Highlights included Chinese iPhone sales doubling year-on-year and unit growth of 44% in the US — supposedly a well-penetrated market. Apple ended the quarter with $178bn in cash on its balance sheet, having generated a staggering $30bn in free cash flow during the quarter.

At Neptune, we have been long-term believers in the Apple story, and continue to hold the stock in a number of our portfolios based on the company’s long-term growth prospects. This is predicated on our belief that Apple has proved thus far that it can — unusually for a consumer electronics company — maintain high margins for a sustained period of time, even as adoption of new technology slows down and competitors produce similar-specification products.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment