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Time to Buy to Let?

Sep 10, 2008
The jury seems to be out at the moment whether now is a good time to buy to let. Some point to falling property values and the shortage of mortgage funds making the cost of borrowing so much more expensive to argue that buying to let makes no sense at all; while others point to pretty much the same market forces leading to a boom in the private rental sector which is largely stocked by those who have bought to let. As with many things, therefore, the answer to the principal question of whether now is the time to buy to let is probably both yes and no.

Certainly, until the credit crunch, many investors were in the buy to let market. With no shortage of cheap mortgages, and a seemingly endless rocketing of property prices, investment in a second or third property to rent out to tenants may have made a great deal of sense. For example, the number of buy to let mortgages granted in the four years leading up to the credit crunch more than doubled, as thousands of part-time landlords entered the market. (Source: The Independent 03.06.08).

Although most buy to let mortgages were interest-only mortgages, the steady rise in property prices allowed successful landlords to remortgage the homes they owned to release an increased equity value, which could then be used to invest in still more buy to let properties.

Nothing in this apparently rosy scenario altered the fact, however, that buying to let is a business endeavour. It will be successful only so long as the arithmetic continues to add up. For many landlords, the wider economic climate has sent things somewhat out of kilter because incoming rents may sometimes now fail to keep up with the rising costs of borrowing. As a result, the landlords still have a commitment to maintain mortgage repayments which are no longer covered by the rents they can earn.

The situation is made worse by the difficulties of exiting the market. Falling property prices may have left some landlords not only unable to meet mortgage repayments from rental incomes but also in negative equity with respect to their outstanding buy to let mortgage or mortgages. Those who can afford to accept a lower sale price in their eagerness to leave the market are simply fuelling further falls in overall property values.

Buy to let optimists, on the other hand, point to the rising tide of private sector tenants, many of whom are currently delaying their own purchase of a home until house prices stabilise. The optimists may argue that now is a good time to buy into a depressed housing market, look forward to inevitably rising rental incomes, and sit out the present housing slump waiting for prices to pick up.

It is not impossible to launch a buy to let investment at the moment, therefore, but it is not a business for the faint-hearted. The risks remain high and the acid test of just how sound is your buy to let proposition will come when you approach the specialist buy to let mortgage lender. In the current economic climate, scrutiny of the business case will be exacting and, if a mortgage is forthcoming it could be costly and may require a hefty deposit on the part of the prospective landlord.

Comparing mortgage rates

You may have read all those press reports spelling doom and gloom about the current housing "slump" and the difficulties faced by the mortgage market. That said, you are confident that things will change and that your future lies with owning your own home. There are enough banks and building societies out there, after all, so you will still want to compare mortgage rates from as many of them as possible Is this you?

An alternative you may consider is to choose the type of mortgage you want, decide on the size of mortgage you need and the term over which it would need to be repaid and use an online broker service such as Confused .com to let them source the best deal for you. This also means that with market offers changing quite as rapidly as they are at the moment, you will get the most up-to-date products.

Although all mortgage brokers will give you mortgage advice, remember that there are different types of broker and this will determine the type and range of deals you will be offered. "Tied" brokers, for example, are generally employed by the mortgage lender whose products he sells. Tied brokers typically will be unable to offer any wider choice than by going directly to the lender concerned.

For a wider range of offers, therefore, it would be worth considering a "multi-tied" broker who deals with a panel of selected lenders. Multi-tied brokers, however, still do not look at the whole of the market on your behalf and you cannot be certain that any mortgage offer made is not the one that earns the most commission for the broker, rather than being the one that delivers the best deal for you.

An independent mortgage broker, on the other hand, is tied to no single or group of lenders and can make his selection from across the whole of the market. Such independent brokers also tend to have many years of experience in the mortgage business and their ability to approach any lender should ensure that they find you the genuinely best deal.

If you want to be able to compare mortgage rates with the comfort and knowledge that your adviser is working under the umbrella of a fully-regulated, industry-wide framework, then your choice will probably be for an Independent Financial Adviser, or IFA. These are regulated by the Financial Services Authority, are required to hold relevant qualifications as a condition of their registration and will need to declare to you any interest likely to affect their selection of lenders they have made to help you compare mortgage rates
About the Author
Confused.com is one of the UK's biggest and most popular price comparison services. Confused.com helps consumers save money on everything from buy to let mortgages to current accounts.
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