More products on the market? Check. Moneyfacts says there are 463 buy-to-let loans available compared with 299 in May last year. Although this should be put into context – there were 3,648 deals available in July 2007.
Rental demand up? Check. As would-be first-time buyers are forced to rent for longer, many landlords are cashing in.
Rates on buy-to-let loans becoming more attractive? Check. With more products coming onto the market, a number of lenders have reduced rates in recent weeks.
But it’s not all good news.
Rating agency Standard & Poor’s says more than 30% of landlords with buy-to-let mortgages will owe more than their property is worth by the end of 2012. Scary stuff indeed, although one does have to bear in mind the significant caveat – house prices must drop 5% this year and 5% next year.
How useful is such a forecast when so many variables have to be met before it can be realised?
Quite aside from the gloomy forecast for house prices, S&P also assumes the position is worse for landlords than owner-occupiers because they have higher LTVs on their mortgages.
It is true that there were a number of high LTV deals available before the downturn, with a couple of lenders, such as CHL, owned by Irish Permanent, lending up to 90% LTV at the start of 2007. But not every investor was taking out such deals.
There may be some truth in S&P’s assertions that landlords will struggle to remortgage next year because of high LTVs.
Yet, this is not necessarily because of negative equity but rather lenders reducing their maximum LTVs. Since the downturn, most lenders require 35% or even 40% equity in a property for remortgaging purposes.
So, even if you didn’t borrow more than 75% LTV, if your property is located in an area where prices have fallen, you may struggle to remortgage. There are remortgage deals available at up to 85% LTV, but landlords will be penalised with a higher rate, so of course it makes sense to reduce your LTV by as much as possible.
Landlords worried about remortgaging should, of course, be taking precautions now.
Many have shifted onto cheap ‘go to’ rates at the end of their fixed or discounted deals, so won’t be paying more than around 2% above base rate. With rents rising, many landlords will be enjoying healthy profits.
Some will have been using this cash to expand their portfolios. Others will be overpaying on their mortgages to reduce the LTV or at least keeping the cash handy to pay off a chunk of the mortgage when the time does come to remortgage, knowing that interest rates won’t stay this low forever.
Will there be a rise in arrears for landlords or widespread forced selling of buy-to-lets? I think it unlikely.
The vast majority of landlords know exactly what they are doing and regard their buy to lets as a serious investment. They won’t want to walk away from them when times get tough because where else would they invest their money? No, they will work hard to make it work.
The other way of looking at this survey is that the majority of landlords with mortgages won’t have to worry about negative equity. And there will be others who don’t have mortgages on their investment properties who will have no worries at all in this regard.
S&P needn’t worry about landlords paying their mortgages when it’s the owner-occupiers already struggling. Even though interest rates are low, it is they who are likely to find themselves in a trickier position, potentially without a roof over their heads.
Melanie Bien is director of Private Finance
