In the wake of June's 0.25% base rate rise - the fifth in the past 11 months - a report published last month by UCB Home Loans says that, in some instances, rising interest rates and increasing house prices are making it easier for landlords to let their properties.
This is because the combination of high house prices and more expensive loans is pushing more people into the rental market. Ironically, people are renting for longer because it’s more difficult to afford to buy, which is in turn providing a boost to the Buy to Let sector.
The report also indicates that sales of Buy to Let properties have continued at record levels over recent months, despite the fact that both property prices and interest rates on Buy to Let mortgages have been increasing.
This is partly because property investors typically take a long-term view of fifteen years or so when making a purchase, so short-term variations in interest rates are of slightly less concern to them than might be the case in the mainstream mortgage market.
Record growth
Buy to Let lending has increased every year since the sector took off towards the end of the nineties. Just under £4 billion was lent on Buy to Let properties in 2000, but by 2006 the annual lending figure had rocketed to over £38 billion – around ten times higher.
Last year alone the value of loans leapt by 57%, with 330,300 mortgages worth a total of £38.4 billion being taken out. However, this figure does of course include remortgages, which inflates the true rate of expansion.
The huge increase in the number of Buy to Let purchases has had an effect on house prices in some parts of the country, although this has generally been confined to areas in which landlords have been purchasing large numbers of properties. However, in general, house prices have risen simply due to the level of demand in the mainstream mortgage market, compared with the level of supply. In a nutshell, more houses need to be built.
UCB Home Loans says that house price increases are likely to hold back a little during the latter half of this year, as interest rate increases bite. Nationally, the annual rate of increase is expected to drop to between 5% and 8% by the end of this year.
Flexibility
Recent research undertaken among 1,000 brokers by UCB Home Loans showed a strong level of demand from customers for flexible features on Buy to Let mortgages. Of those surveyed, 83% of brokers said that they actively promoted flexible features to their clients.
The ability to make overpayments was the area of flexibility most often enquired about by clients, with two-thirds of brokers putting this in first place. Almost all brokers (99%) said that access to additional funds would be useful to their clients.
Buy to Let fully flexible tracker mortgages from UCB Home Loans, are now identified under the Enterprise brand name, enable brokers to offer their clients a range of flexible features, which are offered as standard on all products. They are:
Instant drawdowns. This provides instant access to additional funds, enabling property investors to make withdrawals of £500 upwards within 3 years of completion of the mortgage. This can be extremely useful for investors who need to access funding to make a deposit on their next property, or to make repairs or improvements to an existing property.
Unlimited overpayments. Investors are able to overpay by any amount, provided the mortgage is not fully redeemed, without having to pay an early repayment charge. This can be useful for people who have recently sold a property in their portfolio, or who perhaps have more rental income each month than is needed for the mortgage repayment.
Underpayments. This gives the customer the ability to pay less than the agreed monthly repayment, provided sufficient overpayments have been made previously. This may be suitable for investors whose income varies from time to time. Landlords can also make use of previous overpayments if their tenants fail to pay on time, or during void periods between tenants.
Payment holidays. This gives the landlord the ability to miss making an agreed monthly payment, provided sufficient overpayments have previously been made. The facility can be appropriate for investors who need to put their income to other uses for a short while. Alternatively, it may be used by a landlord who is looking to sell a property and who does not want to make any mortgage payments until that property is sold.
Borrowback facility. Landlords have the ability to borrowback from the overpayments reserve by making withdrawals of £500 upwards. This can be particularly useful for people who need quick access to a little extra cash, perhaps for making emergency repairs to a rental property.
Brokers are also able to offer their clients a choice of earned income or rental yield calculations on all Buy to Let products. The rental yield calculation is 110% at Bank of England base rate plus 1%, and loans are available on up to 10 properties, with a total aggregate lending of £3m.
UCB Home Loans says that, whilst the Buy to Let sector is likely to remain reasonably strong for the foreseeable future, there will come a point where natural forces come into play and the market balances itself out.
Lending is expected to continue growing over the next year or two – partly helped by the high level of remortgages in the Buy to Let sector – but it is likely that the rate of increase in purchases of Buy to Let purchases will begin to slow down over the next three years.
