KRBS ( Kent Reliance ) have joined The Buy to Let Business Mortgage Club Panel.  KRBS are the only lender currently offering Buy to Let Mortgages at 85% LTV.  They also specialise in lending on HMO ( Houses of Multiple Occupany ) and Limited Company buy to lets.  Given the constraints in the lending market in these niche areas these products have proven to be high in demand.  The Buy to Let Business Mortgage Club will pay a market leading procuration fee of 0.4% on all cases submitted to KRBS. 

Intermediaries need to register here with our Mortgage Club to access the KRBS products.

After a second consecutive quarter of negative growth, the UK economy is now technically in recession. The double dip which many of us feared, has now become a reality.  With this gloomy, yet not unexpected news, how will the buy to let market fare in the months ahead? Will it maintain its place as “golden boy” in the housing market or will its prospects be dimmed?

In recent years tight lending restrictions and a shortage of rental properties have seen private sector rents hitting record levels, contributing to a buoyant buy to let market. However, some analysts now believe that with a double dip recession rent defaults are more likely, resulting in an increase in landlord costs and a decrease in income. The knock on effect would deter first-time landlords from entering the market, and incentivise professional landlords to divest their portfolios, creating a dampening effect for buy to let.

I have no crystal ball, but I am optimistic that this scenario is unlikely to materialise, and a recent survey of property investors in partnership with the National Landlords Association, by BDRC Continental for Platform Mortgages, gives me some comfort.

The study shows that the UK private rented sector is growing. It forecasts that by 2015, 1 in 6 households will be rental. A double dip recession may further fuel the growth as prospective home owners choose to rent, preferring the flexibility rental offers during times of uncertainty.

A time of economic uncertainty also encourages resourcefulness in finding additional sources of income.  This is borne out by the study which shows that a growing number of females (39%) are now opting to become professional landlords.  Many are full-time mums who are attracted by the flexible working hours, affording them more quality family time.

Another growing group of investors are pensioners who choose to become landlords to supplement their pension income. They see property investment as giving them a better return than cash deposits and less risky than equity investments.

The study also contradicts popular opinion that most landlords are the fly-by night types who have jumped onto the bandwagon in the last few years. The research shows that the average landlord has been a landlord for 16.5 years and holds a portfolio of 10.8 properties.  Interestingly this means the average landlord falls outside the criteria of many lenders who cap lending at a portfolio size of 10 properties this however, is an area of discussion for another day! 

Finally the study shows that landlords find value in informed and timely advice, with 40% of landlords choosing their lender based on intermediary advice.  Interestingly only 34% of landlords chose the lender because they had the lowest rate.  For buy to let mortgages using an intermediary is not an option but a necessity. 

With continued demand for rental properties and more diverse investors, the double dip will again show the resilience of the buy to let market given its counter cyclical characteristics.

The recent budget saw the Chancellor raise stamp duty from 5% to 7% on all properties over £2m.  While this might be disappointing for the wealthy buyer of investment properties, it has little impact on the pockets of investors in the wider market.  One sector that won’t be affected is the student property market, where house prices typically range from £100,000 to £250,000. These prices keep stamp duty below the 3% mark, and ensure that yields are enhanced.

When one thinks of student properties, the house of  Rik Mayall and the Young Ones often comes to mind; torn curtains, peeling wallpaper and mountains of dirty dishes. But the reality today is very different from the one popularised by the 80’s TV series. Today, increased competition with student housing has driven up the quality of student accommodation. Let me share with you my experience.

My first buy to let purchase was a three bed semi in Guildford rented to students at Surrey University.  The students dutifully paid my rent before all other important expenses, such as cheap booze and oven chips! Each cheque covered the full school term (12 weeks) providing me with good cash flow, and at £1000 per month, it gave me a greater yield than a family let of £650.

As a proactive landlord I tried to secure a new tenancy in Easter when the student accommodation lists are issued. This allowed me to get a tenancy before the current one expired, minimising any void periods.  More often than not students are prepared to pay the full rent over the summer even though they do not occupy the property just to ensure they secure the best property.  During this period I usually freshened up the property with any necessary minor refurbishments.

In addition to providing a steady income, I also benefited from capital gains. In 1997 I bought the property for £72,000, today it is worth £250,000.  Interestingly the rent has only increased by 400 pounds from £1000 to £1400, indicating that although property prices have gone up 347%, rents have only increased by 40%. It’s possible then that rents have the potential for further increases.

There are several key considerations to owning student properties. Firstly, the landlord should ensure there are no locks on doors. Secondly it is preferable that the students are friends and that the property is let on one AST agreement.  This gives the landlord a wider choice of lenders to choose from, which is important given the limited availability of funding for HMO properties. 

Given the strengths of student rental properties it is surprising there are not more lenders in this space.  It is a sound property investment that translates into good security for the lender.

Yes, wear and tear is higher than with other investment properties but this cost can be mitigated by landlords securing a good deposit.  There is also the risk that if students are not found by September, the property may have to be rented as a family let.  A lender can mitigate this risk by basing the rental calculation on a family let instead of a student let.

Buy to let is becoming more important to the broker market and to stay ahead brokers must show an understanding of this specialist sector.  Demonstrating an understanding of the student market sector and the specific needs of student housing landlords ensure brokers provide good service, maintain their credibility and secure more client business.

During the credit crunch detractors of buy-to-let attempted to tarnish the industry with the same brush as sub-prime. These attempts have proven unfounded. Instead buy-to-let continues to show resilience, and has often been described as a shining light in what continues to be a challenging housing market.

2011 has seen many new entrants to the lending market. As a result the buy-to-let mortgage space has become increasingly more competitive.

One example is the larger buy-to-let mortgages.  Currently, most buy-to-let lenders cap their lending at £350,000, or reduce their LTV significantly at this level. This restriction limits lending for higher value properties more commonly found in the London area.

In 2011 house prices in London experienced a 2.7% increase in annual prices with the average house price in London at £345,208.  Higher property prices in London make it harder for first time buyers to buy property creating strong rental demand as evidenced by London having one of the lowest void periods in the country of 2.4 weeks.

A lending cap of £350,000 creates the anomalous situation whereby investors of high quality London properties are unable to obtain sufficient funding for properties despite their high rental demand and resilience to falling prices.

Strong house prices and high rental demand are characteristic of the London market, and are fundamental to any successful property investment. Existing lending criteria is counter-intuitive and deters many potential investors from investing in higher value properties.

The reason for the restriction from a lenders perspective is that there is a higher probability of default on higher value properties if a landlord faced void periods given the size of the mortgage and the associated costs. 

This is certainly true of a large house worth £750,000 in the Cotswolds which has less rental demand and requires a certain type of tenant.  However this is less true of a Victorian house in Kensington of the same value, where the strong rental demand will mitigate the risk of void periods. 

The restriction has benefitted private banks and boutique lenders who are more open to larger mortgages and have taken business which should fit nicely on the books of a mainstream buy to let lender

2012 offers a wealth of opportunity for the UK Buy-to-Let market. With rents rising across England and Wales by 3.5% according to the LSL Buy-to-Let Index, landlords are gearing up to take advantage of this year’s lucrative opportunities.

There could be a reserved 2-5% increase in rents outside of London, while in London, rents could potentially increase by around 5-10%, propelled by events such as the London Olympic Games.

The Government’s holiday for first time buyers on Stamp Duty Land Tax will come to an end in two months’ time, on Saturday 24th March 2012.

After the tax exemption has come to an end first time buyers will face a tax of one per cent on house purchases between £125,000 and £250,000, and a three per cent tax on purchases over £250,000.

Buy to Let continues to be the shining light in what is still a challenging economic environment.  However with lenders both new and old increasing their appetite for buy to let in 2012, the availability of competitive products at increasingly higher LTVs should ensure the choice of BTL funding is good.  This will be the catalyst for Buy to Let investors to increase their portfolios with more confidence.  Also, with static house prices there will be more accidental landlords who choose to let their property out to buy another property to live in, holding on to their existing property until house prices improve.  With this in mind, rents are likely to continue to rise this year although slower than in 2011, which saw large rises.  This is due to the fundamental economics of supply and demand.  There are still 5 or 6 tenants chasing every tenancy agreement.  This in turn means that yields will creep up as rent rise and house prices stay flat.  On the other hand, rental arrears are on the rise and this needs to be managed to ensure that void periods and missed payments do not change a profitable investment to a loss making investment.  Getting a good rent guarantee in place can help with this and ensuring thorough references and due diligence on tenants is conducted before accepting them into your property.  A buy to let property investment is only as good as the tenants and their ability to maintain their rents so ensuring that a good quality paying tenant is in place is imperative.

There are a number of options for first time landlords, and as lenders start to relax their criteria, this is improving.  However, current lending criteria still favours small to medium sized landlords of 1 to 10 properties.  Smaller landlords have more options at the moment (1 to 10 properties).  Where there is a void of lenders at the moment is for landlords with in excess of 10 properties.  Arguably those large landlords who have the survived the credit crunch and their portfolios are now flourishing should be given more favourable rates since they are experts in the area and run their portfolios like a business.

It is more tax efficient to gear up on your property investment and makes your own money work harder for you.  Nevertheless, with property prices being static, caution should be taken when leveraging beyond 75% unless they are obtain a significantly good price.  This is mainly due to the fact that at sub 75% LTV the products are competitive enough to ensure a good cash flow for the landlord.  In the current climate cash is KING.

The London and South East continue to outperform much of the country with regards to investment.  House prices are generally higher than anywhere else in the UK and with the pending Olympics games bringing increased tourism into the Capital, you can expect rents to perform well in this area.  We do, however, expect property prices will remain relatively flat this year, which is testament to the overall resilience of the housing market given the economic challenges the country has faced over the last 3 -4 years. 

With interest rates low and volatility in the stock market, investing in bricks and mortar remains a good long term investment.  A tangible asset that you can add value to, and thus have greater control in impacting on the value.  With other investments you have no control.

According to a leading letting agency rents should stabilise in 2012 after big rises in 2011.  The rises due to the shortage of rental homes and the ever increasing demand has reached a peak for the time being at least.  There are of course regional variations where London and the south east continue to out perform the rest of the market.

Break clauses in residential tenancy agreements gives both the tenant and the landlord the right to terminate the tenancy during the fixed period of the tenancy.  This can give tenants the reassurance of a little more flexibility in their contract, if they have a 12 month tenancy agreement, it gives both parties the option of two months notice after 6 months.  Landlords, you could argue it isn’t ideal if you want to ensure that you don’t have to pay to find another tenant after 6 months  however, if the landlords circumstances change and they need to sell the property, then you have the option to use your break clause.