Buy to Let Mortgages – where the smart money is

The buy-to-let market dipped in 2005 due to a lack of confidence in the stability of the property market and interest rates, but prices have stayed high and confidence has returned. Now buy-to-lets are big business again and the market is inundated with landlords furthering their investments, and also making the most of the competitive market by remortgaging. Both rental incomes and rental yield (income expressed as a percentage of the value of the property) increased between October and December 2005, by 3.3 and 0.03. A report carried out by the Council of Mortgage Lenders (CML) report also reveals that the value of new buy-to-let mortgages were a massive 50 more in the second half of the year than they were in the first. The number of buy-to-let mortgages arranged also increased, by almost 40.It’s looking very good for 2006 so far – the situation as it stands at the moment means that many potential first time buyers are being priced out of the market, so rental conditions are healthy. Mortgage lenders are really cashing in on the buy-to-let boom. The CML has found that the percentage of buy-to-let mortgages in arrears is less than the percentage of homeowner mortgages in arrears, not only that but the percentage is decreasing on buy-to-lets, whereas it’s growing on homeowners. So the mortgage companies are starting to realise that buy-to-let mortgages are a safer bet, which is why they’re now actively promoting them for the first time. They have also relaxed their previously very strict criteria, so they are more accessible than they ever have been before. The way it has always worked is that to get a buy-to-let mortgage, your rent income should comfortable exceed the mortgage payments, usually by an extra third. A mortgage of £900 would require a rental income of £1200. However, these tight rules are being relaxed, firstly because of the rise in property value, which is making it harder for landlords to reinvest, and also because house prices have been increasing at a faster rate than rent prices, so the sums just haven’t been adding up.A number of mortgage lenders ask for the rental income to be 25 more than the mortgage now, but a notable few, including Northern Rock, are arranging buy-to-let mortgages where the rental income and the mortgage are virtually the same. The LTV ratio that mortgage lenders set is also relaxing – traditionally the landlord would have to pay a 25 deposit, but it is now coming more commonplace for lenders to request just 15. Northern Rock have a mortgage which only asks for 13, and GMAC have an 11 deal.The mortgage lenders are getting very competitive on buy-to-lets, and have slashed interest rates across the board. Here are a couple of the best deals: §The Mortgage Trust - 3-year fixed, 4.75§West Bromwich - 2-year fixed, 4.79. Both have a hefty 1.5 arrangement fee to pay though, so taking that into account, the West Bromwich offer works out at the equivalent of 5.54 over the 2 years. Landlords are not often put off by large arrangement fees however, paying more upfront is preferable to having to charge higher rental rates to cover inflated mortgage payments. The more a landlord can pay up front, the more flexibility they have when it comes to meeting the criteria of rental income versus mortgage payments.If people are considering getting into the buy-to-let business, it’s a good time to do it, but you must do your research first. Look at the rental levels in the area and check that there’s no sign of the area becoming saturated. If there’s a lot of properties currently empty then consider the risk of your property also standing empty. A lot of money has been ploughed into city centres in the last few years, so these areas are most in danger of becoming not only saturated, but also overpriced. If a lender believes a property to be overpriced then they will cut the percentage that they will lend you, back to the old level of 75. You also have to make sure you can cover any periods where the property is not bringing in any income – and be prepared for having to lower the rent because of competition, if the area becomes very popular. There’s a lot to consider before making the leap to being a landlord.

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