Buy-to-let investors boosted by improved mortgage competition

You may not want to increase your buy-to-let property portfolio but there are large numbers of investors who have been unable to remortgage because of the shortage of buy to let finance.  Many are stuck on rates of over 6%.

More options for landlords

For once there is some good news for these investors.  Paragon, one of the largest buy-to-let lenders is back in the market for the first time in 18 months with a range of new products which will be, ‘specifically targeting professional landlords.’

Paragon’s return will be particularly welcomed by big property investors as it will provide finance geared to large portfolio borrowers’ needs, including loans offered on criteria that are not widely available elsewhere.  This includes mortgages to limited companies, multi-unit blocks and Houses in Multiple Occupation. 

Paragon’s new range will include fixed-rates starting from 5.3% and tracker rates starting from 4.3% with maximum loans of 75%.  Given the shortage of any deal longer than three years the five year trackers at 4.55% (Libor plus 3.75%) with a 2% fee and 65% maximum loan to value and 5.05% (Libor plus 4.25%) with a higher fee of 2.25% but a 75% maximum loan to value, could prove to be the most sought after.

‘It’s great news for investors that Paragon has returned to the market,’ commented David Brown, commercial director of LSL Property Services.  ‘Demand for rental properties is high, and rents have risen for seven months in a row. But the constricted supply of cheap mortgage finance has been strangling new investment in the private rental sector. In the last quarter, buy-to-let lending was just over a third of its level in 2008. More buy-to-let products are beginning to hit the market, and increased competition amongst lenders should help this.’ 

Rentals rise

There is likely to be increased activity in the buy-to-let market too as rentals are rising strongly, particularly in London and the south east.  The Association of Residential Letting Agents revealed in July that 70% of its members reported more tenants than available properties.  According to The Royal Institution of Chartered Surveyors' UK Lettings Survey, this supply constraint is starting to push up rents. 

London letting agent Ludlow Thompson says that competition for good flats is fierce and tenants are being forced to make sealed bids to secure the property they want.  The agent claims that the rental market has seen an unprecedented boom in the past year with tenant registrations at ludlowthompson.com up 11% to 8,912 in August 2010 compared with 8,061 in August 2009. Registrations were also up 12% on July 2010, when they stood at 7,959.

‘Summer is always a busy time in the London rental market but in 20 years I have never seen rental properties moving as quickly as they have been recently,’ commented Stephen Ludlow, director of ludlowthompson.com.  ‘There is a huge mismatch between supply and demand in the lettings market at the moment. A shortage of stock is driving up rents as a plethora of young people compete for the few properties available.  Rents are up 15-20% in some cases.’

Demand from professionals

Unable to buy, more young professionals are opting to remain in rented accommodation and rents for one bedroom properties are growing most rapidly according to Ludlow but there is also ‘very high demand for two and three bedroom properties.’

The problems that have dogged the buy-to-let market since the credit crunch have been many -  relatively high interest rates, shortage of funds, massive percentage based arrangement fees, often as high as 3.5% of the amount borrowed, and a severe shortage of any deal longer than two to three years.  Most buy-to-let products have been at around 6% or more in recent months.  All the best buys under 5% - and there are still only a handful – are for a maximum of two years only and most have high percentage based arrangement fees which make a nonsense of the headline interest rate.

But Coventry Building Society and its Godiva subsidiary have just cut rates on variable buy to let mortgages from 4.65% to 3.99% with a fee of £1,749 and are also offering a three year fix at 4.49% - cheap for a buy-to-let loan.  To qualify for the fixes you have to put down a 50% deposit.  However, the fees are low at just £250.  There is an incentive package of free valuation up to £680 and free legal fees for those remortgaging.

These rates compare well with other market leaders such as the 4.69% two year fix from The Mortgage Works which carries a swingeing 3.5% up front arrangement fee.  On a £100,000 loan this effectively adds 1.75% to the headline rate pushing it up to 6.44%.  Similarly, Principality Building Society’s two year tracker at a current pay rate of 3.74% doesn’t look at all attractive when you add in the 3.5% arrangement fee.