Despite a buoyant market, rising property prices and flattening rents will lead to smaller yields for investors while few lenders are helping
The buy-to-let market is extremely buoyant at the moment and the majority of industry commentators believe thatís unlikely to change anytime soon.
However, despite all the good news surrounding the market of late, itís worth pointing out and offering a balanced view, that itís not all rosy Ė at least, not where yields are concerned.
Property prices will begin to rise over the next few months and years. By how much depends on who you ask.
For example, according to a recent report by CBRE Group theyíll soar by 17 per cent by 2018 while both the Royal Institution of Chartered Surveyors and Halifax believes weíll see a rise of 8 per cent in this year alone.
Indeed prises have already risen quite aggressively in London and this will undoubtedly cause a ripple effect to the rest of the South East leading to rising prices across the region. In fact, weíve already seen evidence of this in the last six months or so.
At the same time, rents can only go so high. Over the past few years rents have soared to dizzying heights so it is not surprising that what we are seeing now is more static movement. And this, coupled with rising prices, will obviously affect yields.
Yields of return on investment from buying a property will be smaller because prices will be rising but rents will stay static or rise at a much slower pace.
This then begs the question about funding. When an investor is doing his rental cover of 125 per cent at 5 per cent itís obviously going to be more difficult to achieve a higher LTV. As such, brokers are going to need to know who their clients should be turning to.
There are currently only three lenders that offer 125 per cent at pay rate - Clydesdale, Woolwich and Hinckley & Rugby Building Society.
As far as I am aware every other lender works on the basis that although your pay rate may be 3.5 per cent, it will be calculated at 125 per cent at 5 per cent.
Itís an additional buffer should rates start to rise, which they inevitably will do early next year.
As this trend of rising house prices and stagnant rents continues itís going to get even more difficult for your clients, so unless other lenders change their criteria (which is possible as buy-to-let is set to benefit greatly from the introduction of the Mortgage Market Review next month) brokers would do well to start getting to know the products of Clydesdale, Woolwich and Hinckley & Rugby.
I have mentioned for some time now that Santander is a lender to watch in the buy-to-let market, having previously only showed a small appetite they seem to be loosening their criteria and enhancing their rates to have a real crack in 2014.
For the right person and right property, mortgage applications are going through smoothly with their slick system.
With market leading rates like 3.19 per cent two year fix at 75 per cent LTV with a flat fee of £1495, free valuation and £250 cash back, demand is sure to be high.