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BTL Mortgage Update

Buy-to-let mortgage update
The MPC announced last week that they intended to keep the Bank of England base rate on hold at 0.5%. This is the second month in a row that policy makers have held rates unchanged.

In light of the stabilising interest rate situation we sent our own Mortgage Monkey in search of the latest situation in the Buy-to-let mortgage market to find out what is happening and look at some of the best buy-to-let mortgage deals out there.

Mortgage Monkey surveys the market

This week Moneysupermarket announced that 95% of buy-to-let mortgage products had disappeared. This is depressing news for any landlord or property investor looking for a mortgage. The number of buy-to-let mortgages available for rental properties has apparently dived from 4,384 in April 2007 to just 213 now.

Tightening BTL Mortgage Lending Criteria
The other significant change for landlords looking for finance is that lending criteria has tightened whilst the relative costs have also increased. I highlighted the tightening lending criteria being pursued by some BTL lenders in a recent blog post.

Where as margins above base rates came as low as 0.2% in 2007 and a landlord could get a lifetime tracker at around 0.5% they now start at a wapping 2.75% over base. This is the 3.25% tracker available from the Mortgage Works the Nationwide specialist lending subsidiary with a rate that tracks the base rate until 31/05/10.

The best lifetime tracker currently available is through Birmingham Midshires at 3.75%.

When will BTL lending return to normal?

I’m frequently asked. When will buy-to-let lending return to normal? My answer is, I’m afraid “we are not that far away from normal”. That is normal pre the 2000 lending boom. Before that time lending margins on buy-to-let mortgages were typically around 2% above base.

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The good news is that LIBOR rates continue to fall, which indicates there is some potential for buy-to-let mortgage rates to fall further. The 3 month rate now stands at around 1.4% or about 0.9% above base. LIBOR rates influence variable or tracker rates whilst SWAP rates influence the rates of fixed rate buy-to-let mortgages.

Buy-to-let lending criteria toughens

The problem for landlords is that BTL lenders whilst not shutting up shop completely will only lend to landlords if they can make a decent return and at much lower levels of risk than they previously would have entertained. This means they will only advance a landlord a loan at a much higher margin and because property prices continue to fall they will only accept the risk of lending at much lower Loan To Values (LTV). It is still possible to get 80% LTV.

Three lenders will still allow landlords to put down as little as 20% deposit. The Ecology BS, The Yorkshire Bank and the Clysedale Bank. The last two buy-to-let lenders insist on a penal interest rate of 7.24% to compensate them for offering the larger advance.
Any landlord looking for the best rates below 4.5% will find that these are only available with buy-to-let mortgages LTV of 70%. The exception is BM Solutions which offers a 4.15% 2 year tracker (£1500 application fee).

The Mortgage Works, part of the Nationwide which continues to offer some of the best rates will only lend up to 70%.

The future of buy-to-let lending
Looking at the crystal ball for buy-to-let lending over the next few years I foresee a mixture of good and bad news for landlords. The bad news is that individual BTL lenders will continue to selectively tighten their lending criteria on their products as they adjust their individual risk profiles on property lending in light of wider lending and economic conditions. This will continue until the economy and the property market recovers.

The good news is that the banking system no longer seems to be bust and as individual banks have more confidence in lending to each other LIBOR rates should continue to come. This in turn should reduce the margins charged on variable or tracker buy-to-let mortgages. The margin should eventually come down to around about 2% above base on the most competitive products. Fixed rates will be more influenced by SWAP rates and expectations about future interest rate levels.

What should landlords do?
Well far from me to advise landlords to run their own rental business. Each of you will have your own investment criteria and there are increasingly some great investment deals out there for some landlords who can get the finance.

However, what I can say is that many landlords have sensibly put on hold the decision to remortgage because current products offer less attractive terms and rates than their existing buy-to-let mortgage. This is all fine and dandy but with the Government introducing another £50 billion into the market through quantative easing there are massive inflationary pressures that the economy is being exposed to.

The next government will have to close these off by raising interest rates aggressively. This means a rapid swap to a fixed rate or capped buy-to-let mortgage will be an imperative in order to protect a landlord’s cashflow.

My advice is keep a careful watching brief on my blog posts for regular updates on the best buy-to-let products, the market and when to act.

For more information on buy-to-let mortgages.

The Mortgage Monkey is a buy-to-let mortgage expert giving landlords an insider’s view on buy-to-let finance.

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