Mortgage lenders are relaxing their lending criteria on buy-to-let mortgages and reporting huge volumes of re-mortgaging business over the past couple of months - a healthy sign that people are releasing cash ready for possible future buying. A year ago banks insisted on rent being 130% of the cost of interest on the loan using the standard variable rate (SVR) of about 6.75% as the basis of the calculation. Now we are seeing banks only insisting on rent being at least 100-125% of the interest on the loan and that the interest rate used in the calculation is the actual mortgage rate of say 5%, rather than the SVR. This has meant that much more property fits the banks lending criteria in the last few months, making it easier to invest.
Also over the last few months typical mortgage rates have lowered from about 5.75% to less than 5%, even before any anticipated base rate cuts have taken effect, making property lending around 15% cheaper and rents more profitable.
In addition, properties are more realistically priced and rental incomes are at their highest ever levels - £10,537 p/a on average according to a recent Paragon report. The lowest rental yield was recorded in September 2004 and they have risen gradually since.
The Assetz Property Investment Tracker, which pulls together all the key investment criteria for the UK and overseas markets, reveals in July that the UK buy to let market is currently offering a 35.4% return on initial cash invested.
Case study: A £150,000 2-bed buy to let apartment in Manchester
% £
Deposit 15% 22,500
Legal costs 2.5% 3,750
Typical gross yield 5.8% 8,700
Net rental profit 3.9% 1,033
Capital gain as a return on cash invested 31.4% 8,250
TOTAL RETURN 35.4% 9,283
Stuart Law managing director of Assetz said: "An uncertain property market has provided landlords with a greater number of prospective tenants, as people choose to rent while they await a more stable period for the housing market. It is also likely that buyers are holding out for a drop in interest rates, which are widely believed to have peaked at 4.75%. They are expected to fall in August by 0.25%, which along with falling mortgage rates, will boost consumer confidence and make borrowing to buy property more affordable.
"In addition, developers who have been feeling the pinch have started to be realistic and offer good investor deals, with genuine drops in prices of as much as 20% for landlords who are buying a number of properties at once. The combination of these factors signal that the market is on the crux of a turn and buy to let is back in business."
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