The impact the credit crunch is having on buy-to-let (BTL) landlords is highlighted by research that shows that the amount of rent they need to charge to stay above water has risen by nearly a fifth while the number of investment mortgages available has plummeted.
As one market analyst commented this week: “Developers, landlords and tenants are walking a tightrope.”
According to price comparison website moneysupermarket.com, mortgage products available for BTL borrowers have slumped by 93 per cent in the last year - from 4,384 to 307 - while interest rates on those still available have steepened.
The average rate for 75 per cent loan-to-value BTL products has increased by 0.35 percentage points to 7.33 per cent in the past year, and by 0.63 points to 7.46 per cent for 85 per cent LTV products.
The increases mean that landlords will have to increase rents or fund the shortfall themselves. On a £100,000 interest-only mortgage, for example, the monthly rent needed to cover the interest on the mortgage has increased from £569 to £622.
The rise is compounded by the fact that, on average, lenders now insist the rental income is 19 per cent greater than the monthly mortgage repayments, up from 13 per cent a year ago. It means, in effect, landlords will need to increase rent by 15 per cent to keep up with these two changes.
Louise Cuming, head of mortgages at moneysupermarket.com, said: “These are worrying times for tenants, landlords and developers. With the cost of living spiraling out of control, tenants are unlikely to be willing to wear increased rental demands.
“Those landlords wishing to remortgage buy-to-let properties will find it difficult, with lenders demanding sizeable deposits or charging higher rates.
“This could force landlords to re-evaluate whether it is worthwhile staying in the sector in the current climate. With property prices falling though, there may well be many landlords having to sell their investment at a loss.
“And, all the while, developers suffer while the bottom falls out of the buy to let market.”
So, how can landords survive the credit crunch?
The 20,000-strong National Landlords Association (NLA) is offering advice that it claims will not only help to survive the year-long credit crunch but even benefit from leaner times.
Indeed, many professional landlords are benefiting from increased demand for their rental properties and, in many areas, rising rent, the organisation claimed.
However, what it calls “doom-mongering headlines” about the housing market have understandably led to some becoming increasingly concerned about their financial situation. Its tips are:
* Research, research, research. Thoroughly research the rental market in your area to make sure you are charging the right level of rent and not pricing yourself out of the market. Even during periods of high demand, it’s always better to charge slightly below market rent. It is also important to market your property effectively and remember that different tenants are looking for different things in a rental property. Students will be looking for different things to young families.
* Make your mortgage work for you. If you are struggling with mortgage repayments, or your circumstances change, talk to your lender and try to arrange a new repayment plan. If you are coming to the end of a deal, search the market for a mortgage which best suits your needs. If you are a professional portfolio landlord and you don’t find what you’re looking for with the traditional buy-to-let lenders, it may be worth exploring commercial finance opportunities. Check out www.nlamortgages.co.uk for the latest deals.
* Avoid the void. It is amazing how many landlords experience rental voids because of a lack of forward planning. Marketing your property before the current tenants leave increases your chances of keeping the property fully tenanted. A sure fire way of having no gaps is trying to keep good tenants for as long as possible.
* Pick your tenants with care. Carrying out proper checks on prospective tenants should be par for the course for every landlord. Don’t hand over the keys before carrying out credit checks, bankruptcy searches and previous residency information.
* Together you’re better. Landlords and tenants both benefit from having a good relationship. Courtesy, reliability and availability will make for a happier tenancy all round. What starts off as a small problem can turn into something costly if it’s left to fester. Communication is critical.
* The Golden Rules. The list of rules and regulations with which landlords must comply is long and growing. The risk to reputation and bank balance of not complying is significant. Last year, landlords began having to protect their tenants’ deposits. This year sees the introduction of having to provide energy performance certificates for most rental properties in England & Wales and from February in Scotland.
* Get it protected. Taking a deposit is important. But changes to the law mean the cash now has to be protected in a Government-approved scheme. Mydeposits.co.uk is the only scheme specifically designed to enable individual landlords to hold deposits throughout tenancies. To make life easier when it comes to handing back the cash, it is a good idea to draw-up a clear and simple inventory. Both you and your tenants need to agree and then sign two copies. This should help to avoid disputes at the end of the tenancy.
* Are you covered? There are a number of things for which landlords need decent insurance. From injury to tenants and their guests, to avoiding the dreaded void periods as well as building cover and damage insurance too. Can you afford not to have the right policy?
* Start a “rainy day” fund. Life as a landlord is rarely straight forward and any number of expensive emergencies can crop up without warning. Putting a bit of money aside each month will help take the sting out of the cost of a new boiler or windows. And if it doesn’t rain it pours, so if you’ve got several properties, make sure you put aside even more for the inevitable.
* Get decent advice. Whether you’ve been a landlord for years or if you’re just thinking about taking the plunge, it’s important to get the right advice. The market is always changing and it’s worth listening to the view of an experienced landlord. By joining a landlord association, you gain access to plenty of useful information as well as a listening ear and sound advice when it’s needed.
“It’s now 12 months since the ‘credit crunch’ became a part of everyday conversation,” said NLA chairman David Salusbury. “Although in leaner times we all need to be a little more prudent, for professional landlords with an eye for a bargain, there could well be rich pickings.
“Rumours of massive increases in rent are probably being overplayed but there is certainly a hike in demand for decent and well-placed rental properties. This should be music to the ears of the portfolio landlord, but don’t get caught out.
“Proper advice for landlords is critical. By following the NLA top tips, landlords could increase their chances of getting the most from their properties at a time when the wider economic outlook is not looking so good.”