It is common knowledge now that, during their party conference at the beginning of October, the Conservatives – perhaps hoping for something as headline-grabbing as Ed Miliband’s pledge the prior week to freeze energy prices – announced the early commencement of Help to Buy: ‘Phase Two.’ The controversial policy will see the government underwrite £12bn worth of high LTV mortgages over the coming three years to help first-time buyers into new homes.
The first stages of the scheme are now well underway, and the demand reported by participating lenders has been high. The announcement seems to have been well timed, too, because it coincides with a long-overdue pick-up in the UK economy.
A little over two weeks ago, the International Monetary Fund (IMF) upgraded its forecast for UK growth to 1.4% for 2013 and 1.9% for 2014. This announcement came six months after damning downgrade, and was against the backdrop of a global downgrade of 0.3%.
But what does this mean for landlords?
Help to Buy
Buy to let has been a large part of the UK housing market in the last few years. Due to stagnant or falling prices and a lack of competition, property investors have able to enjoy a true buyers’ market. To some, the economic pickup might seem like the end of the honeymoon, but it really just means that the game is changing.
Granted, buy to let landlords now face additional competition from first-time buyers, and the bolstered purchasing power of this part of the market is certain to have a material effect on house prices. But the Bank of England is carefully monitoring the housing market for signs of overextension, and has the authority to intervene if it looks as though history is in danger of repeating itself. Furthermore, if the projections that Help to Buy will facilitate only 2% of the housing transactions predicted to take place over the next three years are accurate, the effect that the scheme will have on prices is likely to be minimal.
It is possible that landlords will simply need to adjust their strategies, investing in properties for demographics not likely to be taking advantage of Help to Buy (students, tenants on benefits, corporate lets or low-income families, for instance). This way, you will encounter less competition for your target properties and won’t find your tenant pool shrinking.
Buy to let mortgage rates
As the GDP climbs, interest rates are not likely to be too far behind, and the possibility of rising buy to let mortgage rates is a closer and more tangible worry for landlords than the Help to Buy scheme.
The Bank of England could increase the Base Rate from its historic low of 0.5% as early as 2015, and the rates on thousands of buy to let tracker mortgages will rise along with it. The latest figures show that demand for variable and fixed products is roughly even – meaning that around £85bn worth of outstanding buy to let mortgage debt could be affected by a rate rise.
This isn’t counting the banks that have already raised the fixed differentials on some of their tracker mortgages “in response to market factors”. The Bank of Ireland increased the rates on 13,500 mortgages back in May, and though they’ve since reversed the decision in some cases, most buy to let customers are still affected. The West Bromwich Building Society then announced in September that they would increase some 6,700 variable buy to let mortgage rates by 2%.
Landlords should look closely at their mortgage agreements and consider how they want to progress with their investment. For the time being, variable rates are still low; so if you wish to take advantage until the last possible moment, search for deals with short or no introductory periods or with low or no early redemption charges.
Buy to let is still going strong
Not all change is bad, and though the market is going through a transition, there is still plenty of good news for buy to let landlords.
Despite the early start of Help to Buy, rental activity has seen a surge and rental yields remain strong. Buy to let mortgage rates remain close to all-time lows (with fixed rates in particular seeing very competitive, and in some cases record-breaking, falls). In fact, brokers have observed that over a quarter (27%) of buy to let mortgages lent in the third quarter were to first-time landlords. This is the highest level since the financial crisis, and shows that interest in the sector is far from dwindling.
In short, investors willing to adapt their strategy after years of stagnant prices and a sluggish market – and look to the medium to long term for returns – should find that buy to let remains a very viable investment option going forward into what will hopefully be a sunnier time.
Written by Ben Gosling, a writer for specialist buy to let mortgage broker TurnKey Landlords.