From The Times;
Last April there were 2,990 buy-to-let mortgage products available, with an average rate of 5.23 per cent. Today there are 597 products, with an average rate of 6.75 per cent. Some specialist lenders, including Mortgage Trust and Paragon, have stopped offering buy-to-let deals altogether.(1)
Last year lenders would loan up to 90 per cent of a buy-to-let property’s value (LTV), but most landlords now need to raise a deposit of 25 per cent to obtain a mortgage.(2)
Landlords have also been hit by lenders’ demands for increased rental cover — the amount of rent that covers the mortgage. Last autumn landlords only needed 100 per cent rental cover but lenders are now insisting on 120 or even 130 per cent.(3)
(1) An interest rate hike from 5.23% to 6.75% would depress property prices by around 22%, for example £100,000 x 5.23% = £5,230. £77,500 x 6.75% = £5,231.
(2) Fundamentalists think that increasing the required deposit from 10% to 25% would reduce prices by 60%, i.e. if you have a £10,000 deposit, that's a 10% deposit on a £100,000 property but a 25% deposit on a £40,000 property. This is almost certainly exaggerated, the question is, by how much?
(3) Increasing rental cover from 100% to 130% would depress prices by around 23% (i.e. 1 minus 100/130).
Or, if you want to really knock yourself out, we can combine (1), (2) and (3).
Assume that up to now, BTL-er has been receiving £4,707 rent p.a. (£90 per week), which is 100% rental cover on a mortgage of £90,000 x 5.23% on a property 'worth' £100,000 in which he has 10% equity. When he comes to remortgage, the bank will say "£4,707 divided by 130% = £3,621, £3,621 divided by 6.75% = £53,641. Therefore we can only give you a loan of £53,641 on that property".
So our BTL-er faces a stark choice: either
(a) stump up £36,359 to make up the shortfall (£90,000 minus £53,641), or
(b) sell the property to another BTL-er who happens to have a £17,880 deposit and is happy to pay £71,521, which is the highest price that will work under the stricter lending criteria. Of course, under option (b) the original BTL-er loses his original £10,000 deposit and still owes the bank £18,479. Ouch.
Mangled
42 minutes ago
8 comments:
You need to base your assumptions on real interest rates rather than nominal interest rates.
Requiring larger deposits should not mean that house prices automatically fall. Investors should expect a similar rate of return on their deposit.
House prices need to fall as landlords can no longer expect capital growth to subsidise low rents.
Or we could try the really radical option of someone buying it to live in and not having to go through all the machinations of getting a BTL mortgage?
oops, too quick on "t' send button.
This also has the effect of removing property from the BTL market which keeps rents higher for those remaining, which will push up rents and help with the rental cover requirement.
This is geeting a bit complicated for Saturday evening!
Snafu, real interest rates are fairly stable. In other words, nominal interest rates should not have an effect on property prices. But they do. Because people are ... dumb? stupid? hoodwinked? You choose a word.
GS, private sector market rents are the most stable variable in the whole equation. They change in line with incomes. No amount of BTL buying or selling can change this. Any study of property prices starts off from this observation.
Buy-to-let; bacon, lettuce & tomato; bisexual, transsexual& lesbian - it's all getting too acronymious.
D, you forgot Bruce, Lordan, Trower.
Mark, now could actually be the best time to buy property in a generation.
The return of high inflation over the next couple of years will reduce the nominal mortgage debt on many properties in no time at all!
It will be just like how our parents benefited from it during the 1970s!
I'm going to give it a couple of years before I dive back in.
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