Mortgages for Business echoes the sentiments of the Council of Mortgages Lenders (CML) in that the dynamics of the UK buy-to-let market are changing. Mortgages for Business believes that these changes are attributable to a maturing of the market and various economic factors.
One of the most marked changes is an increase in remortgaging. This increase can be attributed to two factors. Firstly, Mortgages for Business has seen a marked increase in the number of investors looking to fix their mortgage rate in order to protect themselves from anticipated further increases in interest rates.
Secondly, and by far the bigger influence in increases in remortgaging, is the effect of property investors regearing their portfolios to release capital to fund further property purchases. In simple terms, a buy-to-let investor who purchases a property and sees its value increase can remortgage the property based on the higher property value to release funds for further investment. This is how professional buy-to-let investors continue to grow their property portfolios
The general slowdown in market growth identified by the CML is underpinned by fewer so called amateur investors entering the market as conditions are less buoyant than they were a year ago. However Mortgages for Business’ professional buy-to-let investors are still extremely activity in the market and continue to purchase significant numbers of properties.
David Whittaker, managing director of Mortgages for Business comments, “The foundations of the buy-to-let market remain extremely solid as long as investors take the sensible view of buy-to-let being a long term investment and not representing a quick buck. The low level of first time buyers means the rental market remains strong. The demand and price increases for flats and terraced houses, the preferred property of the buy-to-let investor, means returns are continuing to be gained through property capital appreciation.”
Interesting the main factor influencing buy-to-let financing in 2004, has been the issue of ‘rent to interest cover’. ‘Rent to interest cover’ is the equation mortgage companies use to calculate whether they will lend on a property or not. In most cases the rent the landlord receives must be 30% higher than their monthly mortgage repayment. As interest rates have risen, the monthly mortgage repayment has also risen. Rents have in some cases struggled to keep pace with these increases.
However, lenders have been swift to react to this change and have designed buy-to-let mortgage products to aid the investors in achieving the desired rent to interest cover. For example, Mortgages for Business now offer products that will work out rent to interest cover at 5% rather than the mortgage product headline rate which will be far higher, making it easier for investors to achieve the rent to interest cover they need.
The tightening of rent to interest cover also means investors are borrowing at lower loan to values. Last year most investors were borrowing at 85% loan to value, but today the loan to values tend to be between 70% and 80%. By borrowing a smaller amount the rent to interest cover is easier to achieve.
The CML also outlines the fact most buy-to-let lenders will lend at 80% loan to value of the property and, on average, the lenders require rental income to be 30% higher than monthly repayments. However investors should note that if they shop around and seek exclusive products, 85% loan to property value is achievable and 25% higher then monthly repayments, highlighting the importance and value of using a mortgage broker.
