For those interested in getting into property investment it is essential to look to those markets that will provide rewards over the long term. Landlords usually try to target areas where the rental yields are frequent and plentiful, but to make the most of the investment property investors need to get in before the market takes off, and as with any investment it is all about understanding the risk.
Both brokers and potential property investors should have done their homework before targeting an area, to decide what they hope to get out of it.
For example, although a lot has been said in the media about the profusion of landlords in university cities, with student numbers on the increase and housing in the traditional student locations finite, it is still proving to be a target for property investment. Other markets that may still prove a good target are foreign nationals working in the UK because although this market is not strong at the moment, it is always likely to improve in time.
New statistics from the Council of Mortgage Lenders (CML) show the buy-to-let market is still growing and is currently worth £19.1bn. In the first half of 2002, 58,000 residential investment mortgages worth £5.5bn were taken out. In the preceding six months this year 42,000 loans worth £4.1bn were arranged. With arrears in the sector improving and the average loan to value (LTV) remaining unchanged at 80% the future looks rosy.
The CML states: ‘The sector continues to offer good prospects over the long term, but borrowers need to take a realistic view of the risks, as well as the rewards.’
The continued interest by investors keen to get in on the market has seen many high street lenders expand their product range to include buy to let. This, in turn, means some borrowers are bypassing brokers as their first port of call for advice.
So if business is still booming, where are the opportunities for the broker? Well, they need to look at more complex cases to ensure they continue to have a profitable and healthy involvement in this sector. What then turns a standard case into a complex one? It is usually something quirky about the property or the applicant.
Buying for students
Take, for example, student lets. Parents buying homes for their student offspring has grown in popularity over the last few years. With over 1,240,000 full-time students in higher education, there is an increasing need for this type of accommodation. As the Government no longer provides a grant, many students have to rely on financial assistance either from their parents, or from student loans. One way in which parents are choosing to decrease the financial burden is to buy a home to let out to their child and to other students. The problem is many lenders steer clear of student lets.
These borrowers will have to look to brokers to help them find the best deal. Brokers do not have to reside in a university town to capitalise on this profitable sector as parents throughout the UK look for advice and information on the investment opportunity.
If something as simple as the type of resident in a let property sets alarm bells ringing for some lenders what other aspects of a case can turn the straightforward into the complex?
Problems usually centre on one of two issues: the ‘risk’ factor and the suitability of the property for the rental market. So what type of things will brokers find themselves having to deal with that demands a more ‘sympathetic’ lender than the average high street firm?
• A high LTV. The average upper limit for a buy-to-let mortgage is 80%, although some lenders will consider a higher LTV.
• Does the borrower have an impaired credit history? This may affect the likelihood of them obtaining a mortgage depending on its severity. However, many non-conforming lenders offer residential investment mortgages.
• For what type of property is the mortgage? Properties above shops, high-rise apartments, converted properties or studio flats can prove tricky to obtain a loan on.
• How many properties does the landlord already have? Brokers may need to look for specific lenders who are keen to deal with ‘professional’ landlords.
• Is a letting agent to be used when the property is put on the market? This can make a difference to a lender’s risk perception. Letting agents can provide a useful security blanket.
• Can the client prove their income? Although some mortgages will be based solely on the rent-to-mortgage ratio others will require evidence that the landlord will be able to meet payments should the property be unoccupied.
With all these elements to be considered it is clear that only some people will fit into the ‘ideal’ borrower mould that newer entrants into the market are hoping to attract. Buy to let is not always straightforward and broker advice is essential for those who are a little removed from the norm.
So what of the even more unusual cases? For those we need to look further afield. Foreign nationals have provided a particularly lucrative market for landlords in the South East, but the future for this sector for both the landlord and the broker has been under a shadow for over a year.
Up until last year this was a significant market with high margins. Property investors were able to let property to foreign business people transferred to the UK for two to five years who did not want the hassle of buying a home. This fuelled riverside developments such as Canary Wharf and Docklands. However, interest has cooled considerably since 11 September and concerns of further terrorist attacks or war with Iraq continue to dampen this sector. This decline has led, in some areas of London, to a glut in executive rental properties. This in turn has led some analysts to predict the buy-to-let market is collapsing ‘ a view which is too London-centric to be true.
For brokers advising landlords who want to appeal to foreign nationals the word is caution. Potential locations must be carefully researched to see if they appeal to this type of tenant and to ensure there is not already an oversupply. As executive properties are costly it is important landlords choose wisely, so they do not end up with an unoccupied property, or having to reduce their rent for it to be occupied.
There is also an opportunity for brokers to go directly to foreign nationals. Some lenders are now branching into lending to foreign nationals who wish to reside in the UK for a short while.
Properties can be purchased on a buy-to-let basis, resided in by the owner while they are in the UK and let out or sold when they depart. By lending on a buy-to-let basis the lower LTV and the suitability of the property gives the lender added security.
Brokers can also consider the offshore buy-to-let market. With a little effort it can be a profitable area, however, the property has to be in the UK. This is a specialist area and few lenders are willing to provide mortgages, which is why the role of a broker is so integral.
The following conditions usually apply when expatriates wish to buy property in the UK to let out: they must have a UK bank account, solicitor and two forms of identification ‘ for money laundering regulations.
Brokers also need to bear in mind that some lenders prefer to lend to foreign nationals or expatriates from particular countries and that these mortgages are time consuming to process and complicated. It will therefore take longer to complete than a UK-based borrower buy-to-let mortgage.
However, despite this additional time factor there is an element that is worth considering when brokers are looking to break into this area.
Expatriate communities are particularly strong at networking and this works to the advantage of the broker when helping clients. By successfully advising on one or two cases they are likely to get a significant number of referrals from others in the community looking to do the same thing. A little effort up front can reap rewards later.
A general word of caution: although the property investment market is currently healthy there is a belief it may cool over the coming months. If this does take place we may see the more inexperienced landlord sell up to the more experienced ones.
Anecdotal evidence also that suggests that in a weak market landlords with a buy-to-let mortgage are more likely to survive than those who own property outright, due to the quality of the home. Despite this, the recent enthusiasm for this sector has seen an influx of high street lenders looking to get a bite of the cherry.
However, many of these lenders will not have the detailed knowledge or experience to understand the complexity of this market and their buy-to-let products may reflect this. As a result, many brokers will find a substantial number of borrowers looking for advice and expertise on what is the best mortgage. If brokers are willing to invest time into this sector they can expand their client base into the more specialist areas.
There is still an essential role for the broker in this market and one that even with the increase in mainstream buy-to-let mortgages is unlikely to diminish over time.
Chris Cummings is marketing director at Sun Bank
Brokers need to be able to deal with unusual requests in order to develop a unique selling point compared to the high street.
Using a letting agent can ease lenders’ concerns over an unusual application.
The foreign national market is complicated, but can prove more financially rewarding.