Buy To Let Investments and Interest Rate Rises
There has been a paradox in the buy to let investment market over the past two years. Firstly, there was the prospect that property prices would continue to rise and therefore more people went into buy to let investments. On top of that, mortgage companies relaxed their lending policies and made it easier to invest in buy to let properties.
Instead of insisting on rent being at least 130 percent of mortgage payments, lenders accepted as low as 100 percent cover. The temptation was great, and many people took a bite at this investment apple.
On the other hand, as more people bought buy to let properties some areas began to experience an oversupply, particularly with newly built flats, and rentals began to stabilise after a period of high growth. Authorities began implementing more regulations on housing and the Bank of England raised interest rates four times since August 2006, which have increased operating costs.
This has put the squeeze on buy to let investors, especially first-time landlords. What are the prospects?
Mortgage Costs
In less than a year, interest rates have gone up a full percentage point, which means that if you have a £50,000 loan you now have to pay an additional £42 per month in interest. There is talk of another quarter-point increase before the summer ends. Landlords are really feeling the pinch, especially since rents are not increasing in many areas.
If you took out a fixed-rate mortgage, you probably are about to finish a 3-year fixed rate deal shortly. That means you will soon have to make much higher monthly mortgage payments. It is best to arrange for a mortgage package to help cushion you from the shock of higher payments. You should finish these arrangements before the fixed-rate term ends so that the new agreement immediately kicks in.
You may have to get a sense of where interest rates are heading. A significant majority think that rates are likely to go up some more, in which case you might want a fixed-rate going forward. However, if you think interest rates have already peaked and will soon trend downwards, then you may negotiate for cheaper alternatives, a discount tracker perhaps, which will charge a few ticks less than the base rate.
Rental Income
Rental rates started to peak around two years ago, even as property prices continued to rise. This has helped to reduce the rental yields on buy to let. There are estimates circulating in the industry that point to a decrease in average rental yield from 6.3 percent about two years ago to only 5.7 percent of investment currently. This has made it doubly hard on first-time landlords, or those who do not have a broad portfolio of properties, since there is less income to absorb increasing costs.
For this reason, many buy to let investors have put their properties up for sale to cash in their profits from property appreciation (although they will have to contend with capital gains tax once they sell).
Before you consider selling your property, you may want to review the market situation. It seems that rental demand is about to increase which could boost rents upwards. Because of increasing immigration, from Eastern Europe principally, favourable employment rates, and continued demand among those unable to purchase their own house, the prospects may be brighter in the days ahead. It is possible the trend has already begun to turn. There are indications that rent rose by 1.8 percent in the first three months of the year.
It may be time for you to see your financial advisor or a mortgage broker to help you sort out the best arrangement in this environment of rising interest rates. Our mortgage partner, CKFS, can help find the best mortgage deals available so fill in the form on this page for a no obligation quote.
