According to the latest rental market intelligence from HomeLet, private rents in the UK are continuing to enjoy robust year-over-year growth, with May 2014 seeing a 7.5% increase over May 2013 . This is far in excess of CPI inflation, which in May was only 1.5% .
House prices are also rising at an inflation-busting pace, with growth across the UK averaging 6.7% between May 2013 and May 2014 . And whilst rental yields in some regions are being squeezed by this breakneck acceleration, the dual benefit of rising income and capital appreciation means that buy-to-let continues to be a sound investment choice for many.
This is good news for new and established landlords, and online articles describing how best to get into buy-to-let are cropping up with remarkable frequency. Indeed, warnings of an imminent increase in interest rates by the Bank of England have done little to deter interest in property investment.
Increasing supply of rental stock is a silver lining for the UK’s growing number of renters, who often struggle to meet the costs of renting privately. An average tenant living on his or her own spends 46% of their take-home pay on rent. In only one region – Scotland – is the proportion less than a third, and in London it is in excess of a half. Indeed, even though the average tenant has seen his or her income grow more solidly in recent months, rents in the UK as a whole appear to be accelerating more quickly .
It is clear, then, that we need more rental properties coming onto the market to meet this demand. This is especially true since the Bank of England suggested capping high loan-to-income lending , which will lock yet more first-time-buyers out of the market. This means that we need more landlords – not just those entering the sector for the first time, but large, institutional investors as well.
Typically, first-time landlords are in their forties or fifties. They have a good income, decent credit and have found a prospective investment that will be self-funding (i.e. the rental income will cover the interest repayments by 125% or more). This profile is, for the most part, what mainstream lenders are looking for.
Now consider someone who has a ten-property portfolio worth over £1m. This landlord has years of experience, is extraordinarily asset-rich – they own more than half of their portfolio outright – and earns a very good income from their investment alone. This individual will be less likely to get a mortgage with a high-street bank.
Of the two archetypes, the latter is less likely to suffer from a tenant in severe arrears who refuses to vacate. The latter is less likely to fall foul of legislation they misinterpreted or did not know about. But the size of the latter’s portfolio leaves them outside of most high-street lenders’ criteria, making it much harder for them to finance expansion.
Alternative sources of finance are becoming increasingly available. Many lenders of commercial mortgages entertain (indeed, even seek out) large-scale investors, and underwrite according to experience rather than exposure.
The ‘specialist’ buy-to-let niche is growing – but as long as those lenders who cater for the majority of the market continue to turn down portfolio business, there will be a severe limitation on how well the rental sector can cater for those who rely on it.
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Some buy-to-let and commercial mortgages are not regulated by the FCA.