Why landlords should still invest in the Buy to Let sector

Since the onset of the credit crunch mortgages have been much harder to access, but this doesn’t mean that landlords should be put off investing further in the Buy to Let sector. 

The more recent decrease in the number of mortgage products readily available can be associated with liquidity within all lenders.  The credit crunch has not only impacted on the more vulnerable securitisation-led lenders, but the high street lenders have also been hit as the effect of this means that their available tranches of funds have significantly decreased in comparison with the same time period last year.  As funding levels have decreased, profit margins have become more important for lenders than the battle for new business and this has in turn created fewer mortgages at higher prices.  Recent figures from the Bank of England have shown that total mortgage approvals in June were down to 165,000, this is a significant decrease in comparison with the 290,000 approvals during the same period last year.

While a year ago landlords had become accustomed to the leading two year fixed rate and variable rate deals being priced close to the Bank of England base rate, they have, in more recent months, had to come to terms with a rate that is generally 1.5% - 2% higher than the Base rate.  According to research from Moneyfacts (as of 12th July 2008), the average rate on a 2 year fixed Buy to Let mortgage was 7.02%.
The lack of funding available has also urged lenders to become fussier about who they will lend to.  Borrowers are being asked for much larger deposits and the majority of mortgage products apply a maximum of 75% loan-to-value, this involves supplying a significant £45,000 deposit on a typical UK property worth £180,000.

Mortgage arrangement fees have also increased.  Landlords now have to find up to 3% of the loan to cover the arrangement fee, which is a significant increase on last year – according to a report from Moneyfacts the average arrangement fee in November 2007 stood at £827, and this is significantly lower than the charges being applied in the market today.
 
Despite these difficulties, the situation is not as gloomy as has been reported.  The last few weeks have seen several lenders cut their mortgage rates.  Nationwide, Abbey and the Woolwich were the first to cut their rates, while the Halifax has recently announced that it will cuts its rates by up to 0.15 %.  An example of how this cut will benefit landlords is that the cost of a 5 year fixed deal will reduce from 6.49% to 6.34%, reducing a monthly payment on a 25 year interest only mortgage from £811.25 to £792.50. 

While these recent price cuts are not enormous, they are a step in the right direction, but landlords must not be swept into thinking that the mortgage market has fully recovered.  With the latest inflation data revealing that the consumer price index rose from 3.3% to 3.8% last month - 1.8 points higher than the Bank of England's 2% target, the Bank of England could yet be forced to increase interest rates later in the year.   Fixed rates, however, continue to improve, with products in the range of 6% to 7% now coming to the market.  As a consequence, landlords should keep a close eye on what products are available.  The market is currently difficult to predict and what is on offer today may be gone tomorrow so landlords should act quickly to secure the best mortgage deals for their current circumstances.