Mortgages And The Buy To Let Lending Boom

Property investors looking to take out buy to let finance can expect to find mortgage products being offered as cheaply as mainstream residential loans.

Traditionally buy to let mortgages have been subject to a higher rate of interest than residential loans however fierce competition has brought about a level playing field in what has increasingly come to be perceived as low-risk lending.

Many more lenders are looking to attract a growing number of would be investor landlords with mortgage products offering up to 90 percent of the value of the buy to let property – the end results are that investors no longer need such a large deposit to put down and lower rental requirements.

The buy to let bandwagon shows little sign of slowing down in the wake of these new developments, contrary to analyst predictions in previous years, with the number of mortgaged properties reaching the one million mark.

The world of buy to let investment is far from rosy however with buy to let property repossessions up at record levels. While more competitive and flexible lending products of this kind offer greater financial implications and benefits to the borrower, there is also a danger that the promise of greater savings may attract investors into a saturated market when the outlook for returns is uncertain.

In recent years, the buy to let borrower would expect to pay an additional loading of around 0.75 to 1 percent in mortgage costs, whilst as recent as a decade ago, mortgages on buy to let properties would often be charged at 3 percent over normal rates.

More flexible lending criteria and more relaxed loan restrictions have again displayed the markets enthusiasm of property investment lending – Many more lenders have now increased the traditional 80 percent loan to value limit up to as high as 90 percent – this will come at a premium compared with other buy to let mortgages and will be based on rental income that do little more than cover the loan repayments.

When assessing borrower affordability, lenders have used future rental income as a way of determining eligibility rather than income multiples. In the past many lenders would usually have required this rental income to amount to 130 percent of the mortgage interest repayments – some lenders will now accept a figure as low as 100 percent rental cover.

The danger with taking out a loan on this basis is that a lower rental cover could leave a borrower more financially exposed to having to subsidize mortgage repayments and other general costs out of their own funds – This could be particularly dangerous in an environment of rising interest rates.

The differential between loan costs has been especially tight in the very recent past as industry statistics have shown lower rates of arrears and repossessions in the buy to let market than among residential homeowners.

Arrears were just 0.59 percent of total buy to let loans in the second half of 2006, compared with 0.89 percent in the wider mortgage market, according to the Council of Mortgage Lenders. Repossession rates in the buy to let market were 0.14 percent against 0.15 percent in the residential market.

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