Commercial insurance article archive
Buy-to-let feels the crunch
The buy-to-let mortgage market appears to be in difficulties following a reduction in competitive mortgage products and stricter lending criteria as the credit squeeze begins to take its toll.
Recent figures from the Royal Institute of Chartered Surveyors (Rics) paint a mixed picture of the buy-to-let market as, while demand for rental properties has continued, access to properties has become harder for world-be-landlords as mortgage products become scarce.
The organisation said 16 percent more chartered surveyors reported a rise than a fall in tenant lettings, down from 20 percent in the last quarter. Significantly, demand for family homes still remains stronger than for flats due to an oversupply of new build.
Some 23 percent more surveyors reported a rise than a fall in demand for houses compared to 12 percent surveyors who reported a rise in demand for flats - down from 15 per cent last quarter.
In spite of this increasing demand for new property, new landlord instructions declined for the first time since the survey started in 1998, with one per cent more surveyors reporting a fall than a rise in landlord instructions compared to 11 percent in the previous quarter.
Every Investor reports that the credit squeeze has caused buy-to-let lenders to demand bigger deposits, higher rates and even turn away business making it difficult for investors to keep up with payments or enter the market.
According to the Council of Mortgage Lenders (CML), the number of landlords experiencing difficulties with mortgage repayments rose by 25 per cent in the final quarter of 2007.
The number of landlords in arrears on their mortgages by more than three months increased to almost 7,600 during the final three months of last year - up from about 6,050 in the previous quarter - while compared to the same period in 2006, the number of landlords in arrears was up more than 54 per cent.
In addition, the higher demand for houses in comparison to flats means that more capital is required to make a worthwhile investment
Michael Saunders of Citi European Economics told the Independent: "Given that rental growth has stayed quite strong by all accounts, the rise in buy-to-let mortgage arrears probably is a side effect of increased borrowing costs. Worse probably lies ahead as the full effects of the tightening in lending standards by mortgage lenders – and resultant rise in mortgage lending spreads – comes through."
Scottish Widows announced in March that it would temporarily stop accepting applications for graduate, flexible, key-worker and buy-to-let products.
Difficulties in the buy-to-let sector have also hit property investment club Inside Tack, which has seen more than 100,000 potential investors attend its seminars in recent years. The Daily Mail reports that the company has had to make 44 redundancies and has announced it will stop offering free taster seminars held at hotels and conference centres. Inside Track boss Tony McKay told the publication: "There is less demand for seminars. We are focusing on existing members who are still buying properties but at a slower rate."
Meanwhile, Money Marketing reports that Council of Mortgage Lenders director-general Michael Coogan has warned that if every lender acts in ways that protect their own interests, the market will suffer.
He told delegates at the Great Housing Market Debate in last month that lenders are likely to focus on lower risk remortgage loans rather than purchases while mortgage customers will be offered deals which are linked to market rates products rather than base rates.
"I think if every lender acts in a way which protects their own interest we’ll end up with the worst outcome for the market overall but they're all having to take short-term responses to an environment changing daily," Mr Coogan said.
Although the credit crunch has restricted the number of buy-to-let mortgages approved, established investors are reaping the benefits of the shortage of mortgage products with gross yields increasing at their fastest pace since the third quarter of 2005, Rics found.
This rise in yields may have stopped the recent retreat of landlords from the market as the percentage of landlords selling their properties when tenant leases expire fell from 6.5 per cent to 4.6 per cent, the organisation said.
According to Rics, key areas enjoying rental growth also picked up sharply in the north, south-east and Midlands while London and the south-west experienced moderate rises.
Barry Hall, a spokesman for the organisation, highlighted the inherent difficulties in present in the market.
"While banks remain cautious about offering loans, demand for rental property will continue to increase with many would-be-buyers unable to make the jump to home ownership. Established investors continue to reap the benefits of the current uncertainty in the housing market and have been enjoying the fruits of rising rents, but new investors are struggling to get the necessary finance to enjoy this buoyant sector," he concluded.
07 Apr 2008