Buy to let
27 Aug 2006
Figures from the Council of Mortgage Lenders released during the first three months of 2006 showed a 39 per cent increase in the number of buy-to-let loans during the second half of 2005. One in six of all mortgages are now for buy-to-let properties (Hampton International Mortgages survey).
A survey from the Royal Institution of Chartered Surveyors in May showed rents climbing at their fastest since July 2001. This is due to an increase in the number of tenants as prospective first-time buyers are being forced to rent.
Moreover, the Government has predicted that the number of households in the UK will increase by more than two millions over the next 10 years, fuelled by a trend towards smaller households and a surge in workers coming to Britain from other EU countries.
The key to finding a worthwhile buy-to-let opportunity is securing sufficient rent to cover the mortgage payments on the property. Generally speaking, a property needs to yield rent of 6 per cent of the purchase price each year. The national average yield is currently 6 per cent, so it is critical that prospective landlords identify UK property hotspots.
A May report from UCB Home Loans, the buy-to-let arm of Nationwide, has identified a number of such towns and cities.
London has returned to favour after five years. The Olympics have made East London especially attractive.
Generally, the prospective landlord needs to be able to show a lender that the property can generate 1.25 to 1.3 times the interest on the mortgage payments. This allows for repairs, letting agency fees, wear and tear and untenanted periods. Furthermore, most lenders will require a deposit of 15 to 20 per cent.
However, interest rates for buy-to-let mortgages have come down, and are now quite close to those for standard residential loans.
For example, to invest in a £200,000 property you could be asked for a £40,000 deposit. With a mortgage at 6 per cent, the interest-only payments on the £160,000 loan would total £9,600 a year. To make 130 per cent of your mortgage payments you would need to be confident of receiving £12,448 a year in rent, which means a monthly rent of £1,040.
UCB Homes also identified Swansea, Colchester, Rugby, Belfast, Bristol Peterborough and parts of Glasgow as being favourable for professional property investors.
There are concerns among lenders that there may be over-supply of newly built flats and apartments. They may also be over-priced. As well as a 15 to 20 per cent deposit, there will be stamp duty, legal expenses, surveys and search fees. Because of these costs, experts advise that buying to let should be seen as a long-term investment, with 10 years a reasonable period.
It is vital to ask for a mortgage broker's advice to make sure that the figures add up.
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