Should I be advising my clients to purchase a buy-to-let property at the present time?
There has been a lot of speculation in the financial press over the past 12 months about the future direction and strength of the buy-to-let (BTL) market. At the beginning of the year, a number of influential commentators were predicting a sharp decline in the BTL market would be triggered by an overall fall in property prices which, in turn, would cause many existing landlords to sell their investment properties in order to protect the substantial capital profits they had made in previous years. Fortunately this doomsday scenario has not arisen.
Property prices have continued to increase during 2003 and the latest market research reports most BTL landlords are looking to add to their portfolios.
This new confidence is being driven by a belief that the demand for rented property is increasing as first-time buyers are finding it increasingly difficult to raise enough capital to get on the property ladder. For many there is little choice but to rent for longer periods while saving for a deposit. There is also a growing demographic trend of more people living on their own. Government research predicts tenant numbers will increase by 46% to 3.5 million by 2021, maintaining a steady demand for rented property.
There is no doubt that in some property hotspots, such as parts of London, there has been an oversupply of rental property, which has caused rents to fall, but in many other areas of the country, especially the North, the BTL market continues to go from strength to strength.
What type of people purchase properties to rent out?
Since the 1990s, the BTL market has matured. While there are still many ‘amateur’ landlords who have just one investment property, there has been a growing trend of more sophisticated ‘professional’ landlords emerging who own multiple properties. Research indicates that, on average, ‘professional’ landlords have eight or nine properties.
Professional landlords tend to remortgage their portfolio of properties on a regular basis to take advantage of better deals and therefore offer advisers an opportunity to look after their clients’ more complicated needs and develop a long-term relationship with them.
What type of mortgage products are available?
BTL products now account for around 3.5% of all residential lending. From an initial group of eight providers, there are now over 85 institutions offering more than 250 different products. This increase in competition has been good news for investors and advisers, as lenders have offered an increasing range of competitively-priced mortgage products. Investors can now choose to fund their property purchases through a range of fixed, discounted or variable rate products.
Potential landlords will need a deposit of at least 15% and be aged over 21. The amount that can be borrowed will be dictated by the income the property will generate – not the investor’s own earnings. To cover mortgage repayments, unavoidable running costs and to allow for times when the property is unlikely to be unoccupied most lenders will insist the rental income stream covers mortgage repayments by between 120%-130%.
What types of properties should investors consider purchasing?
Whether a client is an experienced landlord or somebody looking to invest in a BTL property for the first time there are several golden rules that should be followed. The most important is to buy the right type of property at the right price in the right area for the right type of tenant (which may not be the type of property they would buy for themselves). Flats and terraced houses located near to shops, good transport links and schools are the most popular properties to rent.
Before a client purchases a property, however, advisers have an important role to play in discussing with them whether BTL is a suitable investment option for them. As with any investment, clients should be made fully aware of the risks, opportunities and rewards before they commit themselves. BTL is not a licence to print money and investors should see it as a long-term investment – five to ten years at least.
One of the first tasks of an intermediary, therefore, is to manage the investor’s expectations and ascertain investment objectives. If obtaining a regular monthly income is important then properties attractive to students should be considered. These tend to be located in less attractive areas and are cheaper to buy. However, such properties are not likely to appreciate in value as quickly as a more expensive flat in a better area, which is likely to appeal to a professional person. Local letting agents should be able to provide advice on the current state of the local market – namely the types of properties in demand and the rents being attained.
How will the regulatory changes being proposed by the FSA affect the sale of BTL mortgages?
The brief supplied to the Financial Services Authority (FSA) by the Treasury was that it would be required to regulate mortgage lending which met a number of conditions, including ‘loans secured on property where at least 40% is residential accommodation to be occupied by the borrower or their immediate family.’
BTL mortgages fall outside of this definition and, as a result, will not be affected by the new regime because they have traditionally been seen more as a business product than a residential product. There is currently an on-going debate within the mortgage industry whether this perception is correct. If BTL mortgages continue to be purchased by people looking for a way of funding their retirement, it seems inevitable the FSA, in due course, will review this omission.