Andrew Frankish of Mortgage Talk looks at why buy-to-let has replaced shares
There is no doubt that the buy-to-let market has soared in recent years, with both property prices and rental income providing ongoing buoyancy in the sector as a whole. Both rental yields and house prices did well during 2006, and a recent survey from Mortgage Express showed 39 per cent of their existing buy-to-let customers intended to increase their portfolios.
As the ripple effect continues to be felt further from the South East, Northern buy-to-lets are the top choice for investors. Moreover, this fact is bolstered by a stock market that has struggled for popularity with investors, despite recent rallies.
This figure is given further credibility by a poll commissioned by The Property Investor. This revealed that over 70 per cent of investors are relying on buy-to-let for their future wealth, with less than two per cent opting for stocks and shares.
Longer-term investors
According to the Association of Residential Letting Agents (ARLA), investor landlords remain committed to the long term, with the life expectancy of their investments averaging 16 years. Even more importantly, almost half of these investors (45.8 per cent) are aiming to create a nest egg for the future, with 43.2 per cent hoping to benefit from both rental income and capital gain. A mere 3.5 per cent admitted to hoping for short-term capital gain, while only 7.5 per cent have invested solely for income.
This growth can be considered even more impressive when you consider the warnings the industry in general has put on the potential gains that the buy-to-let market has to offer. The mortgage industry is experienced enough to highlight to BTL customers the risks involved in this type of product. Having said that, however, there is one additional concern that we have overlooked, and which could come back to haunt us.
The implications BTL mortgages have on investors' potential future borrowing are often overlooked, and this has particular significance when it come to borrowing for their own residence. Despite all the information available to borrowers about the risks involved, there is very little reference as to how potential future borrowing can be affected.
Credit references
One important point to consider is the way in which BTL mortgages are registered for credit reference purposes. In the first instance, the temptation to not declare an existing BTL is foolish, as they will invariably show up on credit reference searches. Secondly, credit reference files are now detailed enough to indicate to potential other lenders the nature of any existing mortgage - in other words whether they are residential or buy-to-let.
Traditional prime residential lenders such as Nationwide and Halifax require a rental income on any buy-to-let mortgage to be 125 per cent of the interest payment at base rate or higher. However they both differ when it comes down to the documentation required to provide evidence of the income, as the Halifax requires an ARLA registered letting agent to confirm the rental income amount in writing. As a contrast, the Nationwide may also request actual copies of the signed rental agreement from your tenants. As always credit score and Loan to Value also play an important part in the process.
However more specialised lenders, such as BM Solutions and UCB offer BTL schemes that are far more flexible in their approach. For example, if the credit reference search shows the existing mortgage commitment as Buy-to-let the application will be accepted without the need for rental conformation, although the borrower can expect the interest rate that the lender levies to reflect this. Of course, the irony of this situation is that UCB and Nationwide are part of the same group, as are Halifax and BM Solutions.
Nevertheless, one alarming fact that many new Buy-to-let investors overlook is that, if they are looking to move their main residence at the same time as they have no tenant in their investment property, this could easily affect which lender will consider lending on their main home.
Of course, because of the different criteria being used, it is unlikely that the borrowers will be precluded from getting a mortgage facility altogether, but it could lead to them being granted a less favourable interest rate.
So how is this like to affect the future market? The simple answer is that we are already seeing a growing number of new lenders entering the lending market. Typically, these lenders are looking to streamline there processes and simplify criteria to bring a more flexible approach to lending.
A second home in the sun
With more and more people borrowing on their main residences to fund their holiday home buying, do we need to consider the impact that this trend may have on future borrowing?
Traditionally, funds are borrowed from lending institutions outside the UK, and secured on the overseas home itself. However, even where the overseas property is intended by the borrower to be self-sufficient and let out to holiday-makers and potential longer term tenants, there is no guarantee of income or return on investment. As such, should lenders view this borrowing as being included within the total borrowing that an individual has to his or her name?
Of course, the only effect that really matters is what actually happens in practice, and the industry view is that this is unlikely to have a detrimental effect on the buy-to-let market. The fact is that we exist very much in a buy now, worry later culture and, as such, if people can find a reasonably pain-free way of satisfying their aspirations, they will do so. That fact alone means that the buy-to-let market will go from strength to strength.
Coupled with this is that fact that there still remains much scepticism in stock market investments as a means to bolster failing pension provisions. This translates to a burgeoning culture of second, third and more investment properties for many people.
Andrew Frankish is managing director of leading broker Mortgage Talk. Visit mortgagetalk.co.uk