Though it may be some way below the peak levels of 2007, buy to let has remained an attractive investment prospect both throughout and after the financial crisis – and if you look at the figures, it’s not hard to see why.
As 2014 gets underway, the economic and market conditions for buy to let continue to look promising. Low interest rates mean that buy to let finance is near its all-time cheapest level. Despite both this and the government’s Funding for Lending and Help to Buy schemes, however, residential mortgage finance remains out of reach for many, and the rental market continues to grow – with demand pushing the average rent in England and Wales up by 1.6% since November 2012.
It’s not all roses from a financial perspective – heavy buy to let investment over the past year has boosted supply, and the early introduction of the Help to Buy mortgage guarantee scheme in October subdued demand that was, due to seasonal factors, already likely to be lacklustre. As a result, rental income is not inflation-proof – November’s increase was below both the CPI and RPI (2.1% and 2.6% respectively). It should be said, though, that rental income remains far in excess of the average wage growth recorded between August and October 2013 by the Office for National Statistics – a paltry 0.6%.
Looking at the regional picture, this is shown to be particularly pronounced. The East of England saw the worst performance in November in annual terms, with a 12 month drop in rents of 5.5%.
Looking ahead for 2014
The sharp fall in unemployment to 7.4% in December fuelled conjecture that Mark Carney, the governor of the Bank of England, could start to increase interest rates before the 2015 general election. There is still no indication, however, that the BBR is likely to lift from its historic low of 0.5% in the next 12 months.
This means that borrowing costs are likely to remain cheap in 2014, though landlords looking to the longer term might consider locking in to fixed rate mortgages by this time next year. Larger deposits, overpayments and repayment/part repayment mortgages are all good hedges, as they limit the impact of interest rate hikes.
The Mortgage Market Review
The MMR, which will come into force in April 2014, is one of the biggest shakeups the financial services sector has seen in a long time. Whilst it only relates to regulated mortgage applications, we could see some ‘spill-over’ into unregulated buy to let business.
This is likely to come, if at all, in the form of more stringent lending criteria. The MMR will entail more rigorous scrutiny of interest only applications, as well as stress tests for future interest rate hikes. As many buy to let lenders also operate residential arms, it is quite feasible that changes in practice on one side of the fence will affect practice on the other. Whether this will result in a more landlords using specialist lenders remains to be seen.
We might also see a rise in desperate homebuyers, locked out of finance by the new regulations, turning to buy to let mortgage fraud to get the money they need. Expect greater scrutiny from your lender going forward.
The Funding for Lending Scheme
2012’s Autumn Statement included a mini-makeover for the FLS, which has been extended until 2015 but geared more towards small and medium enterprise (SME) lending. In April 2013, the Bank of England extended this definition to include property investors; as long as you have an annual turnover of less than £25m, the FLS may well ease your access to buy to let finance in the coming months.
Buy to let expansion
The latest survey from the specialist buy to let lender Paragon Mortgages, which was released on 19 December 2013, shows that landlords were very optimistic at the close of the year.
A third of landlords expected a net increase in the value of their portfolios, whilst a fifth planned to expand their portfolios in the first quarter of 2014.
As John Heron, Paragon’s Director of Mortgages, observes, talk of a buy to let ‘boom’ might be premature – predictions for 2014 would place buy to let lending at the level seen ten years ago, whilst the rental market has almost doubled in that time – but the slow and steady recovery enjoyed by buy to let landlords in the years since the recession certainly looks set to continue.