Increasing rents & available lending means things are looking good for landlords

Following the recession & the ‘crash’ of the buy to let market it looks like once again things are on the up. Reported figures indicate that over the last year the number of buy to let loans that are available for landlords has doubled & over the last weeks the figure appears to be rising rapidly.

The constraints that were applied to lending during the credit crunch are being relaxed by some of the big lenders with both loan ceiling levels & loan to value levels on the rise. Interest rates on loans are also being cut by some lenders.

Specialist buy to let lenders who ‘closed their doors’ are gradually returning to the market too. For example Mortgage Trust – part of the Paragon Group – is back after 3 years with a promise of cheap & easy mortgages for the smaller landlord.

With first time buyers finding it difficult to get onto the property ladder many are either being forced or opting to rent.

David Newnes – a spokesman from LSL Property Services which is the largest network of letting agents in the UK – said: “Landlords are seeing demand for their properties go from strength to strength. First-time buyers simply can’t afford the average £25,000 deposit required and, as a result, most are remaining in rented accommodation for nearly a decade.

“The growing demand continues to outstrip supply, and this is pushing rents upwards beyond the rate of inflation, and well above wage rises.”

With the subsequent ever increasing demand for rental properties rents being pushed up, this is enticing lenders to view landlords as a good investment for their money. At the expense of first time buyers lenders are choosing to give mortgages to landlords instead. At a recent industry debate hosted by HSBC one of the major lenders – Nationwide – said: “As a lender, we would rather lend 75% LTV [loan-to-value] on a buy-to-let mortgage to an experienced buy-to-let investor, than to a first-time buyer at 95% LTV.”

Stuart Law – chief executive of the property investment firm Assetz – told the industry magazine Mortgage Strategy  that: “Lenders are making no secret of the fact that they would rather allocate the limited funds they do have to the lower-risk option of buy-to-let loans, with deposits of 25-40%, than first-time buyers loans with 90% LTVs . As a result, the buy-to-let sector is recovering at a remarkable rate.”

While potential landlord may be happy with the news, critics point to the negative effect for  first time buyers as well as potential financial implications such as were experienced with speculative behaviour prior to the credit crunch following which 8 out of the top 9 buy to let lenders in the UK were rescued, closed or severely curtailed.

Lloyds Banking Group announced on Friday that it has reached an agreement to sell its estate agency arm, Halifax Estate Agencies, to LSL Property Services for just £1.

The sale of Halifax Estate Agencies (HEA) will result in the closure of approximately 121 Halifax banking counters which are situated within the estate agency chain’s branches, potentially causing 460 people to lose their jobs as a result.

With 218 branches, HEA is the fourth biggest network of estate agencies in the UK. The lack of residential property sales saw a pre-tax loss of £2m, a dramatic drop from their £34m profit in 2007.

HBOS became acquired by Lloyds during a controversial deal made earlier this year.

Lloyds released a statement on Friday, stating that the decision to sell was made as a result of considered reviews by the bank and “concluded that an estate agency operation is no longer integral to its business model”.

The decision comes after measures were made in August by Lloyds announced it was to sell its Insight asset management business to Bank of New York Mellon for £235m.

In efforts to gain approval from the European Commission for aid from the UK government, Lloyds are expected to make big cuts.

LSL currently own a range of estate agencies, such as Your Move, Reeds Rains and InterCounty. The addition of HEA would result in 584 branches and increase their estate agency portfolio to become the second-largest estate agency network in the UK.

LSL considers HEA to have been run to primarily distribute financial services products and held great potential for their business.

“This is a significant opportunity for LSL to acquire a high-quality branch network, an established asset management business and pipeline of sales on favourable commercial terms at a low point in the economic cycle.”

Shares in LSL increased by 5% to 275p and Lloyds shares increased 3.4% to 94.52p during early Friday.

The deal is expected to be completed in January 2010, and include approximately 1050 HEA staff transferring to work for LSL as a part of the agreement.

On Friday, a statement was released by LSL suggested that the acquisition of HEA had been traded ahead of management expectations made in July, with turnover for the 8 months up to 31 August, down by 18%.

LSL revealed that they await the results of 2010 with caution, confessing that “any recovery is likely to be constrained by the availability of mortgage credit and general economic backdrop.”

The Council of Mortgage Lenders (CML) has revealed that the number of new mortgages granted for August is down by 3,000 from 56,000 in July to just 53,000.

Despite such a large fall in granted mortgages, this is still 29% higher than last year’s figure for August.

The CML believe that house sales may have reached a plateau, as most first-time buyers still have to provide large deposits.

Overall, the total value of mortgage lending for buy-to-let and remortgaging for the past year is down by 36% on last years figures.

Long Recovery

The CML’s economist, Paul Samter believes “house purchase activity has revived from its moribund state at the beginning of the year.”

“It will be a drawn-out recovery process with seasonal ups and downs, but house purchase activity is now on a firmer footing.”

According to the CML’s figures, first-time buyers need to find on average 25% deposit in order to receive a home loan.

Regardless of whether a borrower is a first-time buyer or not, two-thirds of all mortgage deals require at least a 25% initial payment.

Relaxing

The Bank of England has claimed that the number of new mortgages approved in August, but not lent, has fallen for the first time in eight months.

From 52,317 approvals, down from 52,404 in July, is a sign that levels may be beginning to level off in the coming months.

Data shows that the number and value of house purchase loans is higher than a year ago, the total value of mortgage lending has dropped by a third.

Standard variable rates are very low, giving borrowers much less incentive to remortgage their house or seek out fixed rate mortgages elsewhere. Buy-to-let mortgages are also down  on a year ago.

“At £12.3bn, gross mortgage lending - which encapsulates all mortgage lending activity, including house purchase, remortgage and buy-to-let lending – declined 36% from August 2008,” the CML reports.

House Prices

The autumn of 2007 saw the onset of the credit crunch, with house prices taking a sudden downturn. Over the past few months, house prices have been steadily rising, giving hope that the recent recovery may become more prolonged.

House prices rose by 2.8% in the 3 months leading up to September, in contrast to the 3 months prior according to the Halifax; the first quarterly increase for two years. Further support to the encouraging recover was made when the Nationwide confirmed that house prices have risen continuously for the past 5 months and have returned to the level of September 2008.

Sales have doubled between January and August and the market seems much more stable in comparison.

Experts have warned, however, that the rise in house prices is supported by the shortage in new properties being put on the market. If there is a sharp rise in houses placed on the property market, the rise in house prices may come to a sudden halt.

The Council of Mortgage Lenders (CML) has revealed that the number of properties repossessed by mortgage lenders rose by 12% in the third quarter of the year.

It has also revealed that the number of borrowers in arrears went up by 8%, and the number of repossession orders made by courts in England and Wales rose by 3% compared to the second quarter of the year.

The figures suggest that things are set to get worse, with more people losing their homes as the country falls into a recession.

Margaret Beckett, Housing Minister, has said that “the Government is taking action to protest the most vulnerable families from repossession… [This includes] a new court protocol to make sure lenders are exploring all avenues before making a claim in the courts, a £200 million mortgage rescue scheme, more free legal representation in county courts, and more free debt advice.”

With interest rates falling, and unemployment rates rising, it is not surprising that so many people are struggling to make their mortgage repayments.

Director General for the CML, Michael Coogan has said that the company still predicts 45,000 repossessions this year, but that trying to predict numbers for 2009 was “premature”.

He also said that it was generally not in the lenders’ interest to repossess properties, and that the Chancellor’s Pre-Budget Report needs to address.
“Conditions in the wider economy suggest a worsening picture for mortgage lenders, however carefully lenders handle their treatment of borrowers in difficulty.”

The CML’s figures also suggest that the buy-to-let market has also become tougher in recent months as arrears for the landlords of such properties are now generally higher than mortgage borrowers.

The CML have explained that: “Reasons include falling rents and an over-supply of rental property in some areas, resulting in some landlords being unable to let their property or achieve high enough rents to support their borrowing commitments…Fraud is also likely to have been a contributory factor.”

Figures also showed that in the third quarter of the year, the number of people behind on their BTL loans were behind by 1.58%, compared to 1.44% of mortgages.

The number of landlords who saw their properties repossessed in the third quarter of the year however, was exactly the same as in the first two quarters.

The CML has warned that this lower BTL repossessions rate is “unlikely to be maintained”.

Also released today were the Ministry of Justice (MoJ) figures, which showed the situation earlier in the repossession process when lenders first go to court for permission to take back a mortgaged property.

Figures for England and Wales shoe repossession claims in the first stage of being processed were 1% lower than in the previous quarter, but overall, 9% higher than the third quarter of last year.

The number of court orders being made by county court judges was up 3% over the quarter, putting them 24% higher than this time last year. However, an agreement is often reached between the lender and the borrower, so many of these cases will not end in repossession.

Chief economist for the Royal Institution of Chartered Surveyors (Rics), Simon Rubinsohn, has said that he doubts that the number of repossessions has peaked just yet. He believes that claims will rise as people lose their jobs and buy-to-let landlords face rising mortgage costs and falling rents.

Even though the number of repossessions is rising, it still does not yet compare to the last property slump in the early 1990’s.

Chief executive of Shelter, Adam Sampson has said that: “lenders may claim they are using repossessions as a last resort, but they must not pat themselves on the back too soon as both repossessions and arrears are still continuing to rise.”

Home equity loan also known as a second mortgage is a loan that allows the house owners to refinance their first mortgage. If you have taken fixed rate mortgage on your house property few years back, then the interest rates may be higher than the prevailing rates. So, you may want to get rid of the loans within a shorter period in order to save some money and also due to the desire of getting some extra cash to meet your financial problems.

If you are availing an equity loan, there are two options available – you can get a second mortgage or you can get a line of credit. The choice has to be made by you and also it depends on the way you will be spending your money. If you are opting for a second mortgage, then you will get a huge amount with a fixed rate of interest and you have to repay the loan in installments for a fixed period. You can also use the extra money you get out of your second mortgage for home renovation, education, vacation etc.

Line of credit is just like getting money out of your credit card. You will get approval for a certain sum and you can draw the cash whenever you felt the need and the current interest rate will be charged. A home equity loan is an easy source of cash for those who are tired of facing financial crunch now and then. Sometimes, the interest rates charged on your equity loan is slightly higher than your first mortgage, but they are much lesser than the interest rates charged on personal loans or credit card. If you are consolidating your debts through home equity, then this will also provide you with some extra savings on the monthly installments. You can collect this money to pay a part of your principal in order to reduce your mortgage burden.

You will be also benefited with the tax deductibility that comes along with the home equity loan. So, you can opt for equity loan for some major expenditure like education, consumer goods and trips. But, those who are spendthrift should not opt for home equity loan because it also carries some risks. If they are unable to pay their monthly dues, they may have to lose their home or they have to face big penalties. Also, some equity loans come with a mandatory lump sum payment to be made at the end of the mortgage term. Though a home equity loan is a great tool to finance your urgent needs, you should not fall into the bait of easy money and should plan before hand to avoid bad credit history.

While there has been much talk of problems in the housing market, starting in the US and expected to move to the UK in due course, will this impact upon the buy to let market – the investment market for companies and individuals alike.

While there is an obvious threat of funding costs rising as pressure on the credit market continues, as well as the risk of property values falling, the buy to let market may just be able to hold out.  As the number of repossessions goes up, we will see more people looking for short term rented properties, which should allow rental income to stay relatively firm.  There are even those in the market who believe that those with buy to let properties at the moment will benefit from the general market turmoil.

However, perhaps one of the largest influences on the buy to let sector will be the price of homes in the UK, and the fact that many first time buyers are not able to grab hold of the ladder, never mind climb up the property ladder.  This has seen a major rush towards rented accommodation and “social housing”, both situations which the buy to let sector can benefit from.

In summary, no matter what happens in the UK property market over the coming months, years, etc, there will always be a need for homes.  Social housing is becoming ever more popular, but the demand for spaces is moving much quicker than the number of new builds.  This will at some stage play into the hands of the buy to let owners, with many people likely to look for short / medium term rental arrangements.