Part One Buy to Let Mortgages

by Mark Johnston

Buy to let it seems is enjoying a return with more people investing in properties as a way of securing finance for their retirements and also as many less fortunate people are turning to renting unable to secure mortgages for themselves.

Figures from communities and local government departments have shown a great increase over the last 6 years in the number of people renting privately owned accommodation by 55%. People who were once potential homebuyers have turned to private renting as they are finding it increasingly difficult to raise any deposits to buy a house, this is due to them needing as much as a 25% deposit (for example a homebuyer purchasing a house at £100,000, which is an average price, would need a deposit of around £25,000). Private renting has therefore increased from 2.15 million in 2003-2004 to a staggering 3.35million in 2009-2010.

With this dramatic increase on the number of people choosing to rent houses instead of buying them there is an equal increase of interest from prospective landlords hoping to acquire decent assets and profit from rising rental yields. This in turn means that buy-to-let mortgages have increased in the number available and also potential buying confidence levels. Effectively meaning that the buy-to-let market which has been out of favour for the last 3 years is now receiving more interest than ever before.

The buy-to-let market is as some industry commentators claim recovering well from the devastation caused by the recent credit crunch, which caused lenders to dramatically tighten and change their lending criteria or even as some of them did, fall by the wayside. Retail director for Clydesdale and Yorkshire banks, Steve Reid states that he is quite positive about the current market as “demand for rental properties is outstripping supply and the market has seen an upturn in the yields being achieved.” In addition to this David Hollingworth, of the mortgage broker London and Country also said that “a number of lenders have returned to the market and new names are also appearing and although nothing moves too rapidly in this market , the rates on offer are getting a bit more competitive.”

The Council of Mortgage Lenders (CML) have revealed figures that show that new buy-to-let mortgage lending in the first 3 months of 2011 totalled £2.9 billion across 27,600 loans, this is an increase on the £2.1 billion over 22,000 loans in the same 3 months of 2010. Upon announcing these figures the Council of Mortgage Lenders (CML) director, Michael Coogan said “the demand for rental property remains strong, and as more funding becomes available we would expect to see buy-to-let lending increase.”

Buy-to-let basics

Most analysis of the buy-to-let market over the past decade, even taking into account the most recent financial problems encountered show a rapid growth. According to the Council of Mortgage Lenders (CML) data there were 73,200 outstanding loans worth £5.4 billion at the end of 2000, however the data also shows that at the end of 2010 there were in excess of 1.3 million mortgages valued at £151 billion.

The buy-to-let mortgage also known as an investment mortgage (a form of residential investment) is designed for borrowers who want to let out their property. Therefore  Potential investors in the buy-to-let market hope the capital value of their property rises over time whilst also allowing them to generate an income from rent.

An independent financial advisor with Honister Partners, Geoff Penrice holds conflicting views on whether his clients should consider buy-to-let as while in the long term he feels “properties will increase in value due to the shortage of supply it would provide worthwhile investment.” However  in the short term he says he “does not believe we will see returns that we have done recently and there will be some downward pressure as real incomes are falling.”

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