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Could Now Be The Worst Possible Time To Buy To Let?

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Telegraph 5/4/14

'The Government’s sweeping reforms of the pension system – which abolish the need to buy annuities and allow savers free rein to invest or spend pensions as they wish – have led to speculation that money will flood into buy-to-let. And many of Britain’s 1.4 million private landlords have indeed profited in recent years. Rising rents have been driven by a shortage of accommodation, especially around large urban centres, and by many people’s inability to get a mortgage.

But is now really the right moment to get into buy-to-let? One distinctly dark cloud on the horizon is the threat of rising mortgage rates.

Calculations by Your Money show how some – especially recent – buy-to-let investors could see their cash flow turn negative as early as 2017 if interest rates rose to the levels hinted at by the Bank of England Governor, Mark Carney. In other words, landlords’ rental income would fall short of their mortgage costs, triggering a monthly loss.

Most at risk would be those who have flocked lately into the market, or who have borrowed against their existing buy-to-let portfolio recently, with interest rates at all‑time lows.

There has been an astonishing resurgence of buy-to-let borrowing in the past 24 months. In the two years between the end of 2011 and the end of 2013, mortgage lending to landlords grew by 44pc, according to the Council of Mortgage Lenders.

The number of property purchases financed by landlord loans rose from 6,200 in 2011 to 9,300 last year. Rates on landlord mortgages, which lenders are clamouring to advance, are now lower than they were in the buy-to-let boom years of 2005 and 2006.

What will happen when rates rise? Earlier this month, speaking about a “return to normal” for interest rates, Mr Carney said the current Bank Rate – 0.5pc since March 2009 – could rise sixfold to 3pc as early as 2017.

Even at 3pc, Bank Rate would be historically low.

The data in the graphic, above, is based on actual rents received for approximately 20,000 let properties across England and Wales. This rental data is collected by property group LSL through its chains of lettings agencies, and then matched against average property values by region.

The calculations assume that a buy-to-let investor has borrowed 70pc of the property value on an interest-only loan at what is today a competitive landlord mortgage offer: Bank Rate plus 3.4pc.

This means that with Bank Rate today at 0.5pc, the mortgage currently costs 3.9pc. If Bank Rate rose sixfold to 3pc, this mortgage rate would more than double to 6.4pc.

The data across the two graphics shows how an average landlord’s post-mortgage income would plunge, or in some cases turn negative, if mortgage rates rose along the lines indicated. The assumptions and underlying information are shown to the right. In London, for example, the average buy-to-let property has a value of £291,500 and attracts a monthly rent of £1,121. An interest-only mortgage on 70pc of the property value (£204,050) at a rate of 3.9pc costs £633 per month, leaving an income for the owner of £458. But a mortgage rate of 6.4pc would cost £1,088 to service per month, dragging the post-mortgage return to the landlord to just £33 per month.

The calculations are theoretical. They assume no increase in rent. They also assume the landlord remains on a tracker-style mortgage which rises in line with Bank Rate, rather than switching to a cheaper deal which might – hopefully – become available. On the other hand, the calculations do not make any allowance for landlords’ other property expenses and “void” periods when the property is unlet.

Rents are likely to rise to some extent over a two-year period, but no one expects them to be able to keep pace with mortgage rate rises if Bank Rate merely doubles or trebles to 1pc or 1.5pc – let alone leaps to 3pc in the scenario outlined above.

David Whittaker of Mortgages for Business, a specialist landlord mortgage broker, said a “rent ceiling” had been reached in many parts of the country. Increased house building will keep the ceiling in place – or bring it down. Mr Whittaker said: “Rents will not rise at the same speed as Bank Rate.” The result would be that “landlords in some regions would be vulnerable to cash flow troubles”. This is borne out by other data that shows how yields – worked out by setting rental income against a property’s price, and not factoring in any mortgage costs – have fallen or remained static over the past year in every one of the 10 regions shown in the graphic. In four – London, the East of England, Wales and the South East – the average yield is now below 5pc. In the South West the yield is 3.7pc.'

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This means that with Bank Rate today at 0.5pc, the mortgage currently costs 3.9pc. If Bank Rate rose sixfold to 3pc, this mortgage rate would more than double to 6.4pc.

So, 6.4pc is "more than double" 3.9pc. :blink:

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“Rents will not rise at the same speed as Bank Rate.” The result would be that “landlords in some regions would be vulnerable to cash flow troubles”.

Common sense tells us that what will highly likely to go up is the cost of debt and the costs to keep and maintain, what is not likely to go up as much is peoples disposable incomes, benefits and wages........those that can afford to buy buy.....who will be left to rent at high rents, who will want to rent at high rents? ;)

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The worst time to get into buy to let is just before prices fall. Who knows when that will be.

This article is assuming a lot.

The increase in interest rates may not happen. Many who retire will not buy to let. Rents will rise if interest rates rise.

I believe the changes to annuities will result in less buy to let as those approaching retirement seek easy gains from pension contributions.

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Doesn't anyone question the basic absurdity of someone borrowing a lot of money from a bank and then getting someone else (who is probably poorer and less credit worthy) to pay the interest for them?

Edited by aSecureTenant

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The worst time to get into buy to let is just before prices fall. Who knows when that will be.

This article is assuming a lot.

The increase in interest rates may not happen. Many who retire will not buy to let. Rents will rise if interest rates rise.

I believe the changes to annuities will result in less buy to let as those approaching retirement seek easy gains from pension contributions.

No rents will not rise if interest rates rise.....the owner/ landlord will have to take the hit......their risk their responsibility. ;)

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...who will be left to rent at high rents, who will want to rent at high rents? ;)

People have to live somewhere. If you own a home, your repayments go up. If you rent, rent rises. If rents go up 20% everywhere, then your only option to pay the same rent is to move somewhere cheaper which means smaller or further away, which isn't always possible. You may not want it, but given the scarcity of property you may have to.

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No rents will not rise if interest rates rise.....the owner/ landlord will have to take the hit......their risk their responsibility. ;)

They can do what they like. They have two options when yields are negative. Sell or increase the rent. Either way the renter pays.

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Doesn't anyone question the basic absurdity of someone borrowing a lot of money from a bank and then getting someone else (who is probably poorer and less credit worthy) to pay the interest for them?

Yes. Personally buy to let is little different from pay day loans. Those who are credit worthy borrow for little and get more from those who are not. The rich rob the poor.

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People have to live somewhere. If you own a home, your repayments go up. If you rent, rent rises. If rents go up 20% everywhere, then your only option to pay the same rent is to move somewhere cheaper which means smaller or further away, which isn't always possible. You may not want it, but given the scarcity of property you may have to.

No it is not your only option.....because rents will not go up everywhere......landlords will be looking for quality, a good tenant is worth more than money....you can include councils in that bracket. ;)

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.landlords will be looking for quality, a good tenant is worth more than money....you can include councils in that bracket. ;)

I thought people got into buy to let for the money rather than quality tenants. Also there are very few council tenancies. If interest rates rise, rents will. Landlords, especially those who have become landlords in last five years, won't want an asset with negative return.

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They can do what they like. They have two options when yields are negative. Sell or increase the rent. Either way the renter pays.

...the customer is king, the customer worth anything always calls the shots......BLT are customers of the lenders, if they don't like the terms and conditions they have other options, the same as a renter does. ;)

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I thought people got into buy to let for the money rather than quality tenants. Also there are very few council tenancies. If interest rates rise, rents will. Landlords, especially those who have become landlords in last five years, won't want an asset with negative return.

No people end up with spare property arising from different circumstances..... Not all are money grabbing, pip squeaking, over indebted highly leveraged, investment landlords........best to check the credit worthiness of your supplier before entering into something you may regret at a later date. ;)

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I thought people got into buy to let for the money rather than quality tenants. Also there are very few council tenancies. If interest rates rise, rents will. Landlords, especially those who have become landlords in last five years, won't want an asset with negative return.

Agreed.

Most people who actually buy to let are banking on capital gains due to price rises. The rent just goes towards the costs they bear while waiting for the capital gains.

And waiting lists for social housing are enormous. Also, social housing is allocated according to a needs-based points system, not on how good a tenant you appear to be.

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Agreed.

Most people who actually buy to let are banking on capital gains due to price rises. The rent just goes towards the costs they bear while waiting for the capital gains.

And waiting lists for social housing are enormous. Also, social housing is allocated according to a needs-based points system, not on how good a tenant you appear to be.

+1

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Agreed.

Most people who actually buy to let are banking on capital gains due to price rises. The rent just goes towards the costs they bear while waiting for the capital gains.

And waiting lists for social housing are enormous. Also, social housing is allocated according to a needs-based points system, not on how good a tenant you appear to be.

I think you will find they are looking for both income and growth........the quality of their tenant is the councils that some rent long-term to, they may get their guaranteed money but not the amount they may have been used to....base rate increases or not. ;)

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Lots of landlords are trying to sell up in my area - many who have been trying to sell in recent years and failed repeatedly. These are both the HMO student types and those who couldn't sell their family home in recent years so they turned to renting the property out.

It seems a curious market as SOLD signs are springing up but there also appears to be a lack of demand.

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Lots of landlords are trying to sell up in my area - many who have been trying to sell in recent years and failed repeatedly. These are both the HMO student types and those who couldn't sell their family home in recent years so they turned to renting the property out.

It seems a curious market as SOLD signs are springing up but there also appears to be a lack of demand.

Paying CT on a empty property for any length of time must be a drain, maybe they should drop the price.....no income no growth. ;)

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Exactly, that's 5% at best, not including voids, with the potential hassle of being a landlord. Taking the £114,000 out of a pension will require over £180,000 due to paying income tax. It's a crap investment strategy as you'll need nearly 60% house price growth just to get the capital back to square one, which of course is then subject to capital gains tax if you decide to sell.

followed by

If you gave me the choice of having property that I can look after or a pension locked away and invested in government bonds & fixed income where I have both the default risks of both the government and financial institution & have to have management pay themselves huge bonuses...I'd take the loses and have the property.

People will be quite happy to give the government 40% of their pension savings just to buy a BTL, even if it clearly pointed out how stupid a strategy this is.

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I thought people got into buy to let for the money rather than quality tenants. Also there are very few council tenancies. If interest rates rise, rents will. Landlords, especially those who have become landlords in last five years, won't want an asset with negative return.

Odd that people still believe that. Plainly rents will not rise if rates rise or for any other reason other than wage rises. First of all, if you can squeeze more out of your tenants, why aren't you doing it already? You can't because the market won't stand it, they are already optimised. The cost of setting rents too high is longer periods without a tenant. You will get less money if you put rents too high. There is a limit to what can be paid determined by incomes and the cost of other necessities leaving less for rent. Rents will not rise because you will lose more money than if you kept them at their current optimised level. Simple fact.

'Quality tenants' in this instance means those that actually pay the rent and don't cause expensive damage, by the by.

Point 2. "Landlords won't want an asset with a negative return." They already have them. In all the rentals Ive taken on where I knew the exact details of the landlords finances (and there have been several) on that property I got the better deal. The landlord subsidised my living costs. These amateur clowns don't understand the business they are in. They buy with no thought whatsoever, no due diligence at all. Buy to lets in the vast majority are on interest only, and the rent less costs barely covers the interest payments. They just pray for capital appreciation. Some of them got it, but even then when you account for the costs of buying and selling the return if there is one is the same or worse as you would get from just putting the deposit amount in the bank. Unless you bought prior to 2004 you're not in a good position.

When rates rise landlords will lose more than they are already and a tenant waiting to buy will be in a better position with every passing day. Capital values will fall, rents will remain static.

A highly leveraged position at a time of historically low emergency interest rates when your only income on the asset is barely covering the interest payments and supplied by personal incomes in a precarious economy… AND with the asset value likely to fall with even modest rises in rates set to wipe you out?… what a mess to be in. Id be shting bricks.

You'll get no solace on this forum sonny.

Edited by cybernoid

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Odd that people still believe that. Plainly rents will not rise if rates rise or for any other reason other than wage rises. First of all, if you can squeeze more out of your tenants, why aren't you doing it already? You can't because the market won't stand it, they are already optimised. The cost of setting rents too high is longer periods without a tenant. You will get less money if you put rents too high. There is a limit to what can be paid determined by incomes and the cost of other necessities leaving less for rent. Rents will not rise because you will lose more money than if you kept them at their current optimised level. Simple fact.

'Quality tenants' in this instance means those that actually pay the rent and don't cause expensive damage, by the by.

Point 2. "Landlords won't want an asset with a negative return." They already have them. In all the rentals Ive taken on where I knew the exact details of the landlords finances (and there have been several) on that property I got the better deal. The landlord subsidised my living costs. These amateur clowns don't understand the business they are in. They buy with no thought whatsoever, no due diligence at all. Buy to lets in the vast majority are on interest only, and the rent less costs barely covers the interest payments. They just pray for capital appreciation. Some of them got it, but even then when you account for the costs of buying and selling the return if there is one is the same or worse as you would get from just putting the deposit amount in the bank. Unless you bought prior to 2004 you're not in a good position.

When rates rise landlords will lose more than they are already and a tenant waiting to buy will be in a better position with every passing day. Capital values will fall, rents will remain static.

A highly leveraged position at a time of historically low emergency interest rates when your only income on the asset is barely covering the interest payments and supplied by personal incomes in a precarious economy… AND with the asset value likely to fall with even modest rises in rates set to wipe you out?… what a mess to be in. Id be shting bricks.

You'll get no solace on this forum sonny.

The expectation of capital gains and the delusion of rental pricinh power have also served me well in rental property too.

The big mistake made by "just raise rents" people is to assume that every other BTLer is in the same boat as them, whereas there will be some mortgage free LLs who would relish an opportunity to have a bit of interest rate pressure on recent entrants.

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Odd that people still believe that. Plainly rents will not rise if rates rise or for any other reason other than wage rises. First of all, if you can squeeze more out of your tenants, why aren't you doing it already? You can't because the market won't stand it, they are already optimised. The cost of setting rents too high is longer periods without a tenant. You will get less money if you put rents too high. There is a limit to what can be paid determined by incomes and the cost of other necessities leaving less for rent. Rents will not rise because you will lose more money than if you kept them at their current optimised level. Simple fact.

'Quality tenants' in this instance means those that actually pay the rent and don't cause expensive damage, by the by.

Point 2. "Landlords won't want an asset with a negative return." They already have them. In all the rentals Ive taken on where I knew the exact details of the landlords finances (and there have been several) on that property I got the better deal. The landlord subsidised my living costs. These amateur clowns don't understand the business they are in. They buy with no thought whatsoever, no due diligence at all. Buy to lets in the vast majority are on interest only, and the rent less costs barely covers the interest payments. They just pray for capital appreciation. Some of them got it, but even then when you account for the costs of buying and selling the return if there is one is the same or worse as you would get from just putting the deposit amount in the bank. Unless you bought prior to 2004 you're not in a good position.

When rates rise landlords will lose more than they are already and a tenant waiting to buy will be in a better position with every passing day. Capital values will fall, rents will remain static.

A highly leveraged position at a time of historically low emergency interest rates when your only income on the asset is barely covering the interest payments and supplied by personal incomes in a precarious economy… AND with the asset value likely to fall with even modest rises in rates set to wipe you out?… what a mess to be in. Id be shting bricks.

You'll get no solace on this forum sonny.

Sonny? Did you read what I wrote? Why do you think I am looking for solace? As for squeezing more money out of tenants, that happens all the time. Rents are up along with prices in London, and if you don't want to pay the increase, no problem for the landlord, it's easy to find someone who will.

I mostly agree with this, but my point is should mortgage interest rates rise rents will rise with them or if rents do not increase landlords sell as they can't keep up the payments. Despite all the warnings of interest rate rises, they have stayed static for 5 years, and I doubt they will rise in the near future as the consequences are too horrendous for the UK. Just going back to 2007 levels of interest rates would see a sharp rise in repossessions.

I don't think now is the worst time to get into buy to let. I think it has been a bad move at any point in the last five years, but I think the worst time is yet to come. Once property prices plateau and there is no appreciation, then that will be the worst time. No one will even consider it once they start to fall.

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Doesn't anyone question the basic absurdity of someone borrowing a lot of money from a bank and then getting someone else (who is probably poorer and less credit worthy) to pay the interest for them?

Yep. People would say you're nuts if came up with a business which involved borrowing money, to buy BMWs, to rent to people on benefits.

Any business that involves selling a product or service to someone with b.gger all money is a bad business. Look at the implosion if Yes Credit, etc.

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Sonny? Did you read what I wrote? Why do you think I am looking for solace? As for squeezing more money out of tenants, that happens all the time. Rents are up along with prices in London, and if you don't want to pay the increase, no problem for the landlord, it's easy to find someone who will.

I mostly agree with this, but my point is should mortgage interest rates rise rents will rise with them or if rents do not increase landlords sell as they can't keep up the payments. Despite all the warnings of interest rate rises, they have stayed static for 5 years, and I doubt they will rise in the near future as the consequences are too horrendous for the UK. Just going back to 2007 levels of interest rates would see a sharp rise in repossessions.

I don't think now is the worst time to get into buy to let. I think it has been a bad move at any point in the last five years, but I think the worst time is yet to come. Once property prices plateau and there is no appreciation, then that will be the worst time. No one will even consider it once they start to fall.

Really? The rental market has very little in the way of good, reliable data on rents and voids.

The London social rental market, in the main, relies on housing benefit rather than incomes.

I would not bet on HB going up.

The London private rental sector relies on finance and government spending.

I would not bet on these either.

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