'It's never been easy money and bills are bigger than you think:' A million more renters fuel the buy-to-let boom
By Neil Simpson, Financial Mail on Sunday
Bills alert: Buy-to-let landlady Maxine Jennings
The buy-to-let boom looks set to continue - despite sky-high mortgage fees, fears of rising interest rates and the chance of political interference should Labour win the next General Election.
Keen investors point to new figures from estate agent Savills that say up to a million more renters will be looking for homes in the next five years - adding to a rental pool that has doubled since 2001.
Many of these new tenants are expected to be hard-working professionals frozen out of the mortgage market by the controversial tough new ‘affordability tests’ imposed by the Financial Conduct Authority. They apply to owner-occupiers but not to buy-to-let investors and are being blamed for a 12 per cent fall in mortgage approvals.
Investors are certainly keen to take up any slack in demand for property.
‘Good rental properties are spotted fast and they sell quickly,’ says Russell Bennett of online estate agent Houses, while broker Mortgages for Business says three in five landlords are hoping to buy more homes this year.
But getting into buy-to-let or expanding an
A good investment…if you work hard
Experienced landlords say rising interest rates and falling prices are not the only problems new investors should prepare for – unexpected bills can hit profits just as hard.
‘The cost of new boilers, washing machines, showers or other appliances can really add up,’ says long-term buy-to-letter Maxine Jennings from Kidlington, Oxfordshire.
‘Spending money on good maintenance from the start should pay off and help you avoid even bigger bills in the future,’ she says.
Like many landlords she recommends service plans and home appliance insurance such as boiler cover from firms such as British Gas. She says potential investors should factor in the cost of essentials such as gas safety checks and HMO (house in multiple occupation) certificates if they are renting properties to groups of students or friends.
Maxine, 60, bought her first buy-to-let in Oxford 20 years ago with builder husband Jim, 62, and has since bought several more.
‘They’ve all been good investments but it’s never been easy money and you have to put the hours in like any other business,’ she says.
existing portfolio remains a difficult and expensive business. Here are the key challenges.
The good news is that mortgage rates for buy-to-lets are relatively low – sometimes less than similar owner-occupier rates.
But application fees are far higher. Many buy-to-let loans charge percentage fees rather than flat rates.
Put down a 40 per cent deposit for a two-year discount with Principality Building Society and you’ll get 3 per cent off its standard rate and pay just 1.99 per cent for your loan. But it will cost 2.5 per cent of your mortgage to set up – £3,500 on a typical £140,000 investor loan – with legal and survey fees on top.
No buy-to-let lender offers mortgages unless you put down at least a 20 per cent deposit and you may need to prove you are employed or have other earnings to cover the interest if the rent stops coming in.
Research shows that the majority of existing buy-to-let borrowers have variable-rate mortgages so they will face higher costs when interest rates rise – and falling inflation and better unemployment figures suggest this could happen sooner than previously expected.
Mortgage brokers say first-time landlords would be better off choosing fixed-rate loans.
Latest best offers include two-year fixes at 3.19 and 3.25 per cent from Clydesdale and Leeds Building Society respectively and five-year fixes at 3.99 per cent from Santander.
Research from buy-to-let specialist Paragon shows that the route to real buy-to-let riches does not stop with a single investment, especially with one bought for cash.
Instead the trick is to obtain a mortgage on a first property, taking advantage of the fact that your mortgage interest can be offset against the rent when you calculate your tax bill.
Then you should carry out regular remortgages, withdrawing enough cash to use as a deposit on another home each time.
Paragon’s calculations show that anyone doing that from 1996, when the first buy-to-let loans were introduced, could have bought nine further properties by the end of last year without having to find any other money themselves.
Repeating the trick from today could be a lot harder, especially if the current housing boom comes to an abrupt end and values slump. But Lee Grandin of broker Landlord Mortgages says it is still possible to extend your portfolio.
He says: ‘The best lenders have changed a lot in the past few years so it’s important to get an up-to-date look at the market, taking fees, flexibility and speed of execution into account as much as the headline mortgage rate.
‘Fortunately there are also new strategies that allow borrowers to raise capital without losing the benefit of existing, low-rate loans,’ he says.
It is worth considering several other potential problems before jumping into buy-to-let. They include Labour’s newly unveiled plans to consider rent caps and longer tenancy agreements if it returns to power after the General Election in 2015.
There are also concerns that rents could temporarily plateau if a flood of new buy-to-let money pours into the market next April when older people are allowed to buy properties rather than just annuities with their retirement funds.
So in all cases it will pay to do your research, to decide if tenant demand will stand an increase in the supply of property and to retain a war chest of cash for rental void periods and emergencies.