The Ups And Downs Of Buy-To-Let

Life for landlords is a mixed bag, but do the positives outweigh the negatives?

Fewer people are taking out buy-to-let mortgages this year than last -- a lot less, according to the Council of Mortgage Lenders.

New buy-to-let lending declined 18% in the first half of 2008 compared to the second half of 2007, which is no great surprise considering the wider economy and the constraints currently facing the UK mortgage market.

But lending in the sector has actually dropped more slowly than the wider market where the number of house purchase and remortgage loans have fallen by a chunky 28%.

And buy-to-let mortgages still represent a significant minority of the total number of UK mortgages -- 9% (11% when measured by value).

So the latest stats are certainly no worse than expected and, in my opinion, actually show resilience within the sector compared to the rest of the market.

But there is one worrying development in buy- to-let mortgages -- the increasing number of landlords falling behind on their repayments.

Arrears rising

First things first, buy-to-let arrears are lower than mainstream arrears. But they are rising faster than in the wider market as landlords struggle with increasing mortgage costs -- from 0.63% of all loans in the first half of last year to 1.1% in the first half of this year. That's a 75% increase.

Even more worrying is the fact that repossessions in the buy-to-let sector have increased 100% in the last year, to 0.16% of the market, which equates to around 1,800 mortgages.

This is more than double the rate of increase in the wider market, leading charity Shelter has called for the Government to step in and help those tenants made homeless because their landlord has been repossessed.

On the bright side

Of course, there are some positives to be found in the market. The increase in rental demand as potential first-time buyers decide to hold off purchasing is a crumb of comfort to landlords, even if it is slightly offset by the flood of properties coming onto the market from frustrated sellers.

And opportunist landlords are looking to snap up bargains as property prices move downwards, with 14% looking to buy in the current market and 40% saying that high tenant demand encourages them to expand their portfolio, according to Paragon Mortgages.

But the majority - 67% -- are sitting tight, neither buying nor selling their properties, instead waiting for the market to pick up.

More positive news comes by way of research from the Property Investor Show, which claims that student towns are achieving yields over and above the national average, with Nottingham topping the table with an average rental yield of 10%. The research shows the national average is just 6.4%, but landlords in the top 10 student towns see a healthy return of 7.9%.

Mortgage matters

One of the biggest difficulties for landlords is the increased cost of mortgage payments and the difficulties they can face switching deals. The buy-to-let mortgage sector has been hit as strongly as the wider market and landlords are feeling the squeeze.

The number of products on the market has fallen by an enormous 93% in the last year, according to recent research, while the rental income required by lenders has risen by 16% and average maximum loan-to-values (LTV) have slipped to 83% from 85%. This means you now need a 17% equity stake, on average, to access decent deals.

Meanwhile, rates have gone up -- at 75% LTV, average rates have increased by 0.35% to 7.33% in the past year for example.

But there is good news. The last couple of weeks have seen a raft of lenders cutting their buy-to-let mortgage rates or introducing new deals, offering relief to landlords struggling to meet their monthly repayments.

Coventry Building Society launched three new buy-to-let rates this week including a two-year fix at 6.19% and a three-year deal and 6.39%. Both are available up to 65% LTV.

Last week, Nationwide subsidiary The Mortgage Works introduced a new range of buy-to-deals starting from 4.85% (although that particular fixed rate comes with an enormous fee of 5%)

And Cheshire Building Society chopped 0.50% off its two-year fixed rate buy-to-let deal, which is available up to 80% LTV at 6.69% with a fee of £1,499.

Brokers at The Motley Fool Mortgage Service should be able to help you the Nationwide and Cheshire deals and other good buy-to-let mortgages too.

Survive the crunch

The lower rate deals will go some way to easing pressure on landlords but, let's face it, mortgages are still pretty expensive for all but the lowest geared investor.

So what else can you do to help survive the credit crunch, which most economists expect to last into 2009?

The National Landlords' Association has produced a list of advice to help beleaguered landlords ride out the current economic storm.

Below are some of its top tips:

• Thoroughly research the rental market in your area to make sure you are charging the right level of rent and not pricing yourself out of the market.
• If you are struggling with mortgage repayments, or your circumstances change, talk to your lender and try to arrange a new repayment plan.
• Avoid the void! Marketing your property before the current tenants leave increases your chances of keeping the property fully tenanted.
• Make sure you have decent insurance. From injury to tenants and their guests, to avoiding void periods, as well as buildings cover and damage insurance.
• Start a rainy day fund. Putting a bit of money aside each month will help take the sting out of the cost of a new boiler or windows.

More: Cut The Costs Of Buy-To-Let | 22 Buy To Let Mortgage Bargains