Old Mutual Securities backs buy-to-let mortgages Equities analysts at Old Mutual Securities cla...
Equities analysts at Old Mutual Securities claim that the buy-to-let market is not on the verge of collapse in a note on financial services firm and mortgage lender Paragon Group.
It comes at a time when there has been speculation over the growth of the buy-to-let market, which has been one of the main factors behind the phenomenal rise in house prices during the past year.
Old Mutual is still positive about Paragon's prospects, however, saying that the introduction of a more restrictive monetary policy later this year will help stop the market going completely out of control, hence providing earnings stability
"We consider the moderating growth in the short term beneficial to the long-term health of the buy-to-let market as this should prevent the overheating that is already evident in some segments of the Central London market," the note says.
The analysts point out that although there has been a significant increase in the competition to provide buy-to-let mortgages, it has tended to be at the "amateur" end of the market, unlike the bulk of Paragon's business, which comes from the small business divisions of major high-street banks.
The amount of buy-to-let mortgages is due to decline in 2003 due to the tightening of monetary policy which will reduce the yield attractions according to the note.
There have been fears that with a rise in interest rates investors of buy-to-let mortgages will not be able to cover their costs.
However, the note highlights that as a large percentage of landlords rent their properties to students these troubles should be marginalised.
"The student population has little gearing to underlying economic conditions and therefore landlords should benefit from a stable source of rental income even during periods of economic deterioration, and thus their mortgage obligations should remain unchanged."
Old Mutual says the fundamentals of Paragon are solid and that the company will continue to do well.
"Our belief is supported by a high level of rental cover on Paragons buy-to-let loan book that is currently running at a conservative 179% of mortgage interest repayment costs."
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