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Pushing The Boundaries Of Buy-To-Let Mortgages

May 17, 2008
Traditionally, buy-to-let properties were purchased by financially astute individuals or professional landlords with more than just a few properties in their portfolios by using a combination of cash and funds from buy-to-let mortgages.

However, as the popularity of buy-to-let property investing has increased, more and more people are using it as an investment vehicle to supplement their income and provide for their retirement. Many individuals who have joined the craze are not financially sound and have little knowledge of business or investing.

This has created a large shift in the lending criteria of buy-to-let mortgages because less financially savvy people do not usually have the means to fund a deposit on an investment property. The result is that loan-to-values have risen considerably and lenders are now more willing to approve buy-to-let mortgages to individuals with impaired credit histories. It is now common to see buy-to-let mortgages advertised with loan-to-value ratios of 90% or more.

Rental cover ratios have also dropped meaning that many investment properties are running at a cash loss even with a historically low rate of interest on their buy-to-let mortgages. If this occurs the investor must be able to pay for the loss with other funds, and it is doubtful they could if they cannot afford a deposit. The lender will want to know how the investor makes up for the shortfall when assessing the mortgage application.

While interest rates remain low and occupancy rates high, the relaxed lending criteria of buy-to-let mortgages has not yet resulted in a major increase in defaults and repossessions. However it remains to be seen whether this will continue when the good times are over, the economy tightens, and variable interest rates on buy-to-let mortgages increase.

If lenders relax their criteria too far many people will enter the property investment arena who cannot cope with an extended period of cash flow losses. If this happens, and the repossession rate rises considerably, buy-to-let investing will lose the stigma of being a financially safe and secure investment.

Additionally, buy-to-let mortgages will suffer as lending criterion will also tighten. This may not necessarily be a negative affect however, as it is doubtful that many financially unsound individuals who are currently being issued buy-to-let mortgages should be in the first place. A tightening of lending criteria on buy-to-let mortgages may realign the property investment market to a more acceptable situation.

Investing in property is a heavy commitment and should be viewed over the long term. By continually relaxing lending criteria mortgage lenders have effectively lowered the bar regarding who can enter the buy-to-let market. Perhaps it will be a good thing if lending criteria tightens back to the position it was in a decade ago when property investors needed cash savings to fund deposits which filtered out inexperienced investors who probably shouldn't enter the market to begin with.

Care should be taken before entering the property investment arena and punters should research both the property and buy-to-let mortgage markets carefully before taking the plunge. If in doubt - contact a mortgage broker for specialist advice.
About the Author
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