The truth about buy-to-let

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23 Mar 2016

The truth about buy-to-let

Author: Michael Cook

Buy-to-let has been making the headlines for a variety of reasons, from the government’s new tax policies to the sector’s on-going growth, making it very hard to get an accurate view on how the sector truly impacts the housing market. And with more tenant demand than ever before these headlines are not likely to stop anytime soon.

Fortunately, the Council of Mortgage Lenders (CML) has analysed data from actual transactions in order to shed a bit more light on what is really happening based on the most common assertions.

Assertion 1

Landlords are borrowing as much as they can because it’s cheap to borrow

CML’s data shows that on average, the loan-to-value ratios of buy-to-let borrowers are actually comparable to residential mortgage borrowers, indicating that high leveraging by landlord investors is no more common than in the residential space.

Average loan-to-value of buy-to-let borrowers graph

Assertion 2

Less than 1/4 of dwellings rely on capital gains for financial return

Buy-to-let borrowing is all interest-only, which is only sustainable if house prices keep rising

According to CML’s data approximately three out of every four new buy-to-let loans are issued on interest-only terms. And supporting this, data from the 2010 Private Landlords Survey shows that less than ¼ of dwellings acquired for use as rental properties rely on capital gains for financial return.

Assertion 3

Interest rates are at historic lows – for now. But when rates do rise, buy-to-let borrowers will be forced to sell up or raise rents to cover their mortgage costs

CML’s data indicates that, over the past two years, the margin between buy-to-let borrowers’ interest rates and the rates at which they could still cover interest payments (without raising rent) is growing. This means that, when considering buy-to-let mortgage applications, lenders are evaluating whether the prospective landlord could cover interest payments at rates above the prevailing rate of 3.2% (as of end-2015).

What’s more, the 84% of new buy-to-let lending is issued at fixed interest rates, and about two-thirds of these are fixed for periods of over two years. The proportion of fixed rate loans with rates fixed for more than three years has gone up from about 10% to 18% since early 2014, reflecting an increasing appetite among buy-to-let borrowers to be insulated from an interest rate hike for a longer period.

Proportion of new buy-to-let lending by interest rate type graph

Michael Cook, Lettings Managing Director at Romans, comments: “If you’re interested in purchasing a buy-to-let property, whether you’re a first-time landlord or an experienced investor, I urge you to form your own opinion of the industry based on facts and not the latest headlines.

“The truth of the matter is that every landlord has their own reasons for purchasing a buy-to-let property, so it’s important to seek advice from local experts that understand the industry in order to form your own opinion on whether this is the right investment for you or not.”

Read the original article from the Council of Mortgage Lenders here

For expert property investment advice talk to the team at your local Romans’ branch, or register your interest in Romans’ investment services here:

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