Newsletter - June 2005

Buy to Let mortgages on the heels of residential counterparts for bargains!  Will we see a price war amongst the Buy to Let lenders?

In 1992, when commercial mortgages used to purchase residential property as investment, were given the label “Buy to Let” mortgages the gulf in pricing between them and their residential equivalent was huge.  This has remained the norm for the last thirteen years, but now we are starting to see real parity in the pricing between the two mortgage types.

“For over ten years Buy to Let mortgages have always been more highly priced than residential mortgages, but as we have gone into 2005 Buy to Let rates have continued to drop and now many products are better priced than residential mortgages.  If anyone had predicted this a few years ago you would have probably been laughed at.  Buy to Let mortgages are now a stand alone investment vehicle, freed from their commercial loan principles.  Changing market dynamics and fiercer competition amongst lenders are the key drivers behind the change and this can only be good news for investors facing a tightening in their margins.”
Comments Jonathan Moore, Marketing Manager of Buy to Let mortgage broker, Mortgages for Business.

“In May we have been able to offer clients mortgages fixed rates at 4.99% fixed for five years, and 4.89% fixed for three years.”

Moore continues by explaining the key forces behind these lower Buy to Let mortgage rates.

6% of mortgage lending in UK is now for Buy to Let purchases and remortgages, with over £50 billion loans outstanding.  In 2004 new niche lenders identified the potential of the market and fairly aggressively sought market share, including companies such as Platform Home Loans (subsidiary of Britannia), Mortgage Trust and The Mortgage Works.  Their pricing was extremely competitive and the more established lenders have now started to react to these new entrants, whereas previously competition between lenders had been far less stern. 

The increased competition has been coupled with huge increases in remortgaging in the sector, with many professional investors being prepared to remortgage large numbers of properties in a single transaction.  The key decision maker when remortgaging being rate in the majority of cases. 

A decline in demand for Buy to Let mortgages from early 2004 has also started to mean lenders are not hitting lending targets.   Most lenders will have set lending pools and they need to sell the money to hit these targets, in some circumstances then the only way to attract additional demand is to offer a lower rate.

The rent to interest cover calculation has limited the Buy to Let investor’s ability to make new purchases and to remortgage current properties (rent generally needs to be 30% higher than the monthly mortgage payment).   By lowering the mortgage headline rate and using this rate (rather than a notional separate rate) as the basis for the calculation makes the criteria far easier for investors to meet.

Wider market conditions have also played a role in lowering rates, particularly of the fixed variety, with the swap (basis for fixed rate pricing) market rates continued to fall in recent markets, allowing lenders to reprice more competitively.  There is also increasing expectation that bank base rate is more likely to fall than rise, largely due to the performance of the retail sector, also meaning trackers will begin to again look more favourable.

Moore, however does sound a note of caution to Buy to Let investors.
“Rates in Buy to Let sector may increasingly be more on a par with residential mortgages, but fees remain far more in the realm of the commercial mortgage sector.  You can expect to up to 1.5% arrangement fee on many of the low priced fixed rates so take this in account when doing your calculations, however this fee can be added to the loan.   Even with these fees added the mortgages are still incredibly well priced”.

RICS – Lettings market survey May 2005

The buy-to-let market has come to a standstill as a result of rising interest rates according to RICS' latest lettings survey, published today (Friday, 27 May). 

New instructions from landlords to let their property halted for the first time since 1998. This indicates a flat housing market and that current interest rates are deterring new buy-to-let investors from entering the market. Despite this, existing landlords are holding firm, with a declining number putting their property up for sale after tenancy agreements expire or are due for renewal.

The market is also seeing increased tenant demand as prospective buyers’ wait until the wider housing market stabilises. Tenant demand is rising at a faster pace across most of the country. 21% more surveyors report a rise in tenant demand, up from 14% in the previous quarter. The demand is greater for flats, which are seeing the largest demand increase in two years. Rent increases are spread across the country, with the biggest rises in the Midlands and the Eastern region.

Surveyors continue to expect moderate rental increases, with 14% expecting rents to rise in the next three months, though their optimism has dipped slightly since the beginning of the year. Any deterioration in the employment market could reduce expectations further.

Investors’ rental returns rose for the first time since 2000 as a result of increasing rents alongside stable house prices. The rise in gross yields has been quite small compared to the rise in borrowing. RICS letting agents estimate that gross yields are around 5% compared to average buy-to-let mortgage rates of between 6 and 7%.
Stagnation of the buy-to-let and wider housing market has led several leading chartered surveyors to warn potential investors against ‘get-rich-quick’ schemes which seek to capitalise on inexperienced investors’ perceptions that property is an easy way to easy money.

Land Registry - Wales at top and bottom of property league table

Land Registry’s latest residential property price report, published today, Tuesday 10 May, shows Wales having both the highest and lowest average price increases for the period January – March 2005.
Merthyr Tydfil and Blaenau Gwent top the list with 44 per cent and 30 per cent increases in the average cost of property compared with the same period in 2004. At just under one per cent, The Vale of Glamorgan has the lowest price rise compared with the average national price increase of 10.27 per cent.

The average house price in England and Wales for the quarter is £183,486 an annual increase of 10.27 per cent compared to an average of 14.06 per cent for the same period last year.
The following information is contained in the report:

England and Wales

• The average price increased by 10.27 per cent from £166,404 in 2004 to £183,486 for the same period in 2005.
• All economic regions in England and Wales show an increase in average prices.
• The volume of sales decreased by 34.77 per cent from 243,914 in 2004 to 159,116 for the same period in 2005.
• 655 properties over £1 million were sold compared to 795 for the same period in 2004.
• 52,963 properties were sold for less than £120,000.

Greater London

• The average property price increased by 9.83 per cent from £262,685 in 2004 to £288,507 for the same period in 2005.
• The volume of sales decreased by 35.93 per cent from 32,448 in 2004 to 20,788 for the same period in 2005.
• 402 properties over £1 million were sold compared to 470 for the same period in 2004

BPF Calls For Measures To Protect Consumers Investing In Buy-To-Let
The British Property Federation (BPF) is today calling on Government to regulate buy-to-let investment syndicates, and for lenders to put in place other measures to protect small investors.

Having met with the Council of Mortgage Lenders and more recently HM Treasury to discuss this issue, the BPF is convinced that the existing arrangements for the DTI to close down the worst syndicates is insufficient to protect consumers and the reputation of the wider property investment sector.

The BPF is therefore advocating that the Financial Services Authority (FSA) takes a more proactive approach to regulating such syndicates.

Ian Fletcher, Director of Residential Policy at the BPF, explains:

“A simple internet search illustrates the phenomenal growth in the number of these syndicates. Picking off the worst on a one-by-one basis is a losing battle, which only protects those investors that have not already invested funds, and only affects those syndicates that have been formed as companies and not other structures.

Consumers, who are primarily small investors, could be protected far better simply by getting the FSA to enforce existing rules on Collective Investment Schemes.”

In current slower market conditions the BPF is also concerned with the lending criteria of some buy-to-let mortgage lenders. The Federation is therefore calling for the buy-to-let mortgage sector to self-regulate a minimum rent-to-interest cover of 130 per cent.

Fletcher explains:

“During the phenomenal growth in the buy-to-let sector the vast majority of lenders have followed the prudent policy of not lending at ratios below 130 per cent gross rent to interest cover. Recently, however, we have seen ratios as low as parity being offered by some lenders in the national press, this at a time when market conditions are less favourable. We do not consider it prudent to be lending at levels which only cover lenders’ interest payments and leave nothing for when the property is vacant, for repair and maintenance, or letting agents’ fees. That is bad for the borrower and bad for the sector."

"The FSA has recently taken responsibility for regulating domestic mortgages. It seems unusual that buy-to-let mortgages are not also covered. We would normally prefer to see the sector self-regulate, but if it does not, it will only require secondary legislation to bring buy-to-let mortgages within the FSA’s control.”

Fletcher concludes by stressing:

“The BPF's membership has an interest in an orderly and disciplined market where property investment purchases are made by well-informed and properly funded investors. The responsible players in the buy-to-let sector abide by this and have provided many small investors with a good long-term investment opportunity. However, the activities of some buy-to-let investment syndicates out to make speculative gains, in combination with some inappropriate lending policies, broaden the scope for misselling and ultimately scandal. Our proposals are easy to implement and we believe necessary to protect consumers and the reputation of the sector.”

Buy-to-let syndicates are responsible for acquiring large numbers of units in individual buildings. Some of the buyers are intending to let their flats and hold them as investments for the medium to long term, others are intending to try to sell on the units before they are completed and have to be paid for.

When a block of flats is completed large numbers of units become available at the same time. This can result in lengthy initial voids and lower than expected initial rents. An investor must factor this into their cashflow.

The speculative buyer is dependent upon either an investor or an owner occupier wanting to buy their unit at a higher price, so that the contract can be "sold on". Although all normal home buyers will get a mortgage offer before exchanging contracts not all speculative buyers do so. This exposes them to the risk that, if values do not rise and they are unsuccessful in selling their contract to someone else, they can be forced to complete, or sued for damages by the developer if they do not complete. It is not a matter of just "losing the deposit" as some buyers believe.

There is also no obligation on developers to reveal to individual buyers that part of the development has been bought by a syndicate. When individual buyers see ‘phase one sold out’ they often wrongly assume that it is as a result of many separate deals, rather than one syndicated deal. In the knowledge of such a fact individual home buyers/investors might make different decisions. The BPF believes there should be an obligation on developers and their agents to reveal bulk purchases.