Whilst some may be talking of rising house prices (more on this later) the market is very tough going for everyone, and especially buy-to-let landlords.
For landlords with existing portfolios much depends on when their properties where acquired; how much equity they have in them; the rental yields; and the mortgage product. Each one of these 3 factors is going to have a big impact on the buy-to-let profitability and in some cases may even lead to property repossessions. Here is a brief summary of each of the 3 factors:
Equity – Prior to the credit crunch landlords could purchase with a 15% deposit, in some cases it was even possible to purchase with “zero deposit” using instant bridging and remortgaging (typical products available form Mortgage Express until early 2008). Many of the buy-to-let properties purchased with 15% deposits post 2005 will now have little or no equity, some will even have negative equity. This becomes a major issue when seeking to raise new finance / mortgages.
Rental yields – Many landlords have seen these falling in the last 12 months, in some cases by 15 to 20%. Additionally landlords have seen an increase in rental voids, thus the actual net yield allowing for the voids is down by up to 30% on the market peak. For most landlords they can only survive the reduced yields due to mortgages that have fallen in line with bank base rates.
Mortgage products – The days of 85% LTV mortgages seem to be “history”, today the norm is 70% LTV, thus landlords need to find 30% deposits. Lenders are also charging relatively higher rates of interest, typically at BBR + 3% along with arrangement fees of 2.5% to 3.5% typical. Whilst bank base rates are at 0.5% this may be OK, but what will bank base rates be in 12 months time? Some landlords taking out a mortgage product today could find themselves paying effective rates of 6% to 7% just 12 months from now.
Overall it is a very tough market for landlords, for many it will be a struggle to hold on to their properties as bank base rates start to rise, and for those entering the market it requires more cash than at anytime in the last 10 years. In time house prices and rental yields will improve for landlords, and mortgage funding will become more affordable, but for now it is a tough market for buy-to-let.
