Buy-to-let mortgages up as property attractive again

Buy-to-let mortgages accounted for a record proportion of lending last month, the latest sign that property is once again becoming an attractive investment for those with ample spare cash. The market is flourishing as the rest of the housing market struggles to recover.

Yet there is concern that some investors are jumping in with unrealistic expectations, while there remains an anxiety over the impact of the buy-to-let resurgence on the wider housing market.

The buy-to-let market was a key driver in the property boom of the nineties and mid-noughties. Wary of traditional long-term savings vehicles and courted by enthusiastic mortgage lenders, thousands turned their attentions to property investment.

Many made their fortunes, but the phenomenon also pushed house prices to unsustainable levels in some areas, with first-time buyers squeezed out by cash-rich investors. The credit crunch brought an abrupt end to the party, as banks and building societies either walked away or reduced their exposure to the market.

That’s now changing, however. Buy-to-let mortgages accounted for a record 13.4 per cent of lending in the first three months of the year, the Council of Mortgage Lenders revealed earlier this month, with an increase of £500 million on the same period in 2012.

There are almost twice as many buy-to-let mortgages on the market now, at nearly 500, as three years ago, according to Moneyfacts, as lenders respond to growing demand for the loans. Much of that comes from amateur landlords, typically homeowners who were unable to sell their property when they moved and opted instead to rent it out. Those slow housing market conditions have driven growing demand for lettings, pushing rental prices up to record highs in part of Scotland over the past few months.

That makes it an ideal opportunity to get into the market, some in the industry have claimed, despite fears of a possible price bubble.

Bryan Robertson, chief executive of Lomond Lettings, said: “With housing prices remaining low, now is the time to invest in the right buy to let property to maximise the opportunity that lack of supply and over- demand is causing in the rental sector. The demand for the right property in the right area of Edinburgh in particular is very high.”

He believes landlords are set to benefit from changing attitudes to renting in the UK. “The economic circumstances encourage people to rent for longer before buying. Indeed, the flexibility of renting may well see a diminishing desire to become tied to a large mortgage for the younger generation.”

But while this might point to buy-to-let as a investment to bank on in the current  climate, it’s far from that simple.

Here we pick out some of the factors to bear in mind if you’re thinking of diving in.

1 Work out the likely income

Buy-to-let property can generate yields of up to 8 per cent, an eye-catching return at a time when savings rates can’t keep pace with inflation. However, the yield can vary significantly with property type.

Mark Dyason, director at Edinburgh Mortgage Advice, said: “At lower purchase prices yields are higher, with landlords getting well priced properties seeing an initial yield of 7 to 8 per cent. This is lower as you go up the price scale, although landlords at higher prices can expect to see greater house price appreciation in the longer term.”

2 Watch out for regulatory costs

Failure to keep up with legislative changes can prove costly. Last year saw the introduction of Scotland’s tenancy deposit scheme, which requires landlords to transfer deposits they’ve received into an approved scheme within 30 days of the tenancy starting.

The scheme also includes an independent resolution service for disputes over withheld deposits.

While the scheme is free for landlords, it also creates the need for more detailed information on the condition of a property, adding to the costs incurred.

“The main threats to landlords are increased and changing legislation,” said Dyason. “You can be compliant one day and in line for a fine the next. The paperwork trail is getting bigger and bigger.”

Landlords letting out themselves also need to be aware of the differences between legislation in Scotland and the generic English law, he added.

3 Do your homework

Demand for private rented accommodation may be soaring, but the wrong property or tenant can still prove a costly mistake.

“While there are significant returns to be made, there are also pitfalls such as investing in the wrong areas and not checking out tenants properly before signing leases,” said Robertson. Then there’s the risk of rent going unpaid. The number of landlords in arrears by more than three months has fallen slightly this year, the CML’s figures show. However, the challenges facing tenants mean that could change soon, with more people falling behind on their monthly repayments as rents rise and incomes are squeezed.

“It is important to reduce the risks in the market by finding the right tenants that will pay on time and reducing void periods,” according to Robertson.