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Capitalising on buy to let

by: Paul Howard
  • 16/05/2011
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Capitalising on buy to let
Paul Howard, head of corporate accounts at Nationwide, discusses his view of the mortgage market and the opportunities that buy to let presents for brokers and landlords.

With slow economic growth and flat house prices being widely predicted, it is evident that 2011 will again be a tough year for the mortgage market. Yet, nothing is more fundamental than the continuing need for homes, whether bought or rented.

Many major lenders have indicated that they want to lend more during 2011, but only if they can do so safely.

Government continues to add pressure on lenders to come up with appropriate schemes to break the current lending stagnation and ensure that first-time buyers and those looking for shared ownership and shared equity deals can still get access to funding.

However, it is clear that many would-be borrowers remain unable to qualify for an affordable loan and home ownership has been relegated to an aspiration for many.

The UK is experiencing a major shift from presumptive homeownership to a situation where a greater number of people are renting for the long term – and being comfortable with it – much like most of continental Europe.

Demand for quality rented accommodation continues to outstrip supply, particularly with the continued growth of single person households and a shrinking social housing sector, leaving an estimated five million people waiting for social housing, according to Citywire.

Against this backdrop the buy-to-let market continues its growth year on year. While nowhere near the volumes of 2007, last year’s buy-to-let lending reached over £9.5bn, up from the £8.5bn in 2009 and figures are expected to rise again in 2011.

Confidence is getting stronger and there are indications that rising demand is driving growth across the buy-to-let sector. This activity is being supported by the increasing number of buy-to-let mortgage products, which have doubled in the last year from 215 to 434 in March 2011.

While some providers have reduced their offering, we are seeing others return to the market.

A small number of experienced providers have strengthened their position in the market, such as The Mortgage Works, owned by Nationwide Building Society, which has concentrated on offering practical and creative products backed by competitive pricing, even for those landlords with deposits of only 20%.

With these factors in mind, existing landlords may be considering expanding their portfolios and prospective landlords may be encouraged enough to join the market.

It is easy to see why. The latest buy-to-let index from LSL Property Services showed that rents increased again in March, rising by 0.4% to £687 per month. This now puts the average rent 4.2% higher than a year ago; rising rents and static house prices mean better yields for landlords.

The research also shows that rent arrears fell from 12.6% in February to 9.4% March, the lowest figure since October 2010.

Despite these additional positive indicators, lender caution in terms of levels of deposits required and lending criteria for prospective landlords continues. With fewer buy-to-let providers to choose from, experienced brokers can really make the difference in highlighting the right deal quickly, particularly with growing anticipation of interest rate rises later in 2011 driving up costs.

But it is in ensuring that potential landlords are fully aware of the responsibilities, and the costs attached, that brokers can provide the greatest service.

They are often well placed to effectively guide potential landlords through the peripheral costs. These can include management and maintenance charges, ensuring adequate insurance, and even the costs of regular utility safety checks, as well as ensuring they mitigate any capital gains tax liabilities on the sale of a property which is not the main residence.

With this in mind, it may be prudent for brokers to concentrate on professional landlords who are already experienced in these matters.

There are products available for lending to HMOs, limited companies and properties in need of refurbishment, which can increase the scope of intermediaries’ advice. Having said this, products that specifically target buy-to-let first-timers are also available.

So, despite the very real challenges, now is a great time for brokers to talk to their clients about possible options, including highlighting potential buy-to-let deals.

With house prices now slightly lower than they were a year ago, potential landlords may even get a good bargain. If they do, they may want to consider dividing their capital into several properties to diversify the risk, rather than investing it into one property.

Either way, the buy-to-let market seems to be on the up and both brokers and landlords look set to capitalise.

Paul Howard is head of corporate accounts at Nationwide

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