With the outlook for savers looking grim, growth in the buy to let sector looks set to continue, despite some high mortgage arrangement fees and growing speculation that interest rates will rise later this year.
A recent report from the Financial Conduct Authority (FCA) concluded what many of us already know, and that is that savers are getting a raw deal, with most big high street banks offering savings rates of 0.5 per cent or lower.
In contrast, the gross yield on a typical rental property in England and Wales reached 5.1 per cent in December 2014, with total annual rental returns at 11.1 per cent, supported partly by a 3 per cent rise in private rents last year to an average of £767, according to the latest data from Your Move and Reeds Rains, illustrating why buy to let is such an attractive investment option.
We expect to see continued growth in rental prices across the UK. Martin Totty, Chief Executive, Barbon Insurance Group
Last year was predominantly “a year for growth” in the rental market, according to Martin Totty of Barbon Insurance Group and he anticipates that the market will grow further this year. He said, “The demand for rental property is increasing, and we expect it to continue doing so in 2015 as large numbers of people are priced out of buying. As a result, we expect to see continued growth in rental prices across the UK as the year progresses, particularly as real incomes are starting to rise.”
With tenant demand continuing to outstrip housing supply, a number of landlords are planning to add to their UK property portfolios by purchasing homes across the country in 2015, according to research from Platinum Property Partners (PPP), a buy to let business.
The study found that 23 per cent intend to expand their portfolio by one property, while 14 per cent hope to purchase two or more rental homes this year.
PPP’s Steve Bolton commented, “Our research reveals that the sector will continue to grow this year, with two in five planning to add to their buy to let portfolio despite a likely interest rate rise.”
Separate research by the National Landlords Association (NLA) also indicates that a significant proportion of landlords will buy more investment properties in the coming months.
The NLA survey found that 31 per cent of landlords will look for additional buy to let lending or to re-mortgage in the coming months with a view to making further property acquisitions.
Rise in silver landlords
Higher demand for buy to let investments this year is also expected to be fuelled by a rise in the volume of so-called ‘silver landlords’ entering the market as new pension reforms approach.
The Government’s proposed pension reforms, coming into play from April 6th this year, are set to radicalise the property industry, with many older people looking to the sector to help fund their retirement.
“In recent months we have certainly noticed a greater interest from those approaching retirement in becoming a part of the buy to let market in response to the new legislation,” said Neil Woodhead of Castle Estates and Founder of Ready Rentals.
He continued, “Some of these ‘silver’ clients are planning to release money from their pension and others have had money tied up in bonds that are coming to an end and, with the increased talk around the growing private rented sector and the potential therein, many are looking at this as a new approach to funding their retirement years.”
But while many ‘silver’ investors will rely on retirement funds to finance their buy to let investments, most property investors depend on buy to let mortgages to acquire property.
Buy to let mortgages
Many mortgage lenders now perceive buy to let to be less risky than standard mortgage products and are currently offering hundreds of different buy to let mortgage products at record low borrowing rates for both fixed and variable deals, with rates starting from just 2.2 per cent.
The value of buy to let mortgages on new purchases increased by 34 per cent to £11.6 billion between January and November last year – £3 billion more than the corresponding period in 2013.
The number of landlords taking out mortgages on new purchases in the UK also grew by 21 per cent to 93,970 between January and November 2014 – with 8,500 handed out every month.
This compares to a modest rise of 13 per cent among home movers and first-time buyers as they faced tougher lending regulations – while the buy to let market remains broadly unregulated.
Poor savings rates are turning savers towards traditional bricks and mortar. Graham Davidson, Managing Director, Sequre Property Investment
Graham Davidson, of Sequre Property Investment, said, “Many people are turning away from the more traditional but volatile investments, and poor interest rates on their savings, in favour of the tried and tested route of bricks and mortar. The buy to let market has never been healthier.”
Lack of bank support
Despite the upturn in buy to let mortgage lending, a recent NLA survey found that many investors are still struggling to gain access to finance, due to tighter restrictions.
Just over two-thirds of landlords rely on a buy to let mortgage to fund their portfolio, according to the NLA, but the latest findings show that one in five – or approximately 300,000 – landlords have not been able to expand due to difficulties in accessing buy to let finance over the last year.
Carolyn Uphill of NLA said, “A significant number of landlords are having trouble accessing finance and expanding, which is a major concern because the private sector is vital in meeting the ever increasing demand on housing at the moment.”
Separate research from PropertyLetByUs found that over three quarters of landlords do not feel that banks are offering enough to support buy to let landlords.
Just 17 per cent of landlords feel they are getting enough support from lenders and one in ten landlords have faced problems securing a buy to let mortgage.
Jane Morris, Managing Director of PropertyLetByUs, said, “Buy to let lenders typically want rent to cover 125 per cent of the mortgage repayments and many are now demanding 25 per cent deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy to let mortgages also come with large arrangement fees.”
You can help
Aside from marketing the right type of properties that buy to let investor may be interested in buying, agents can also help investors build up a property portfolio, by helping them to raise the finance required to fund their property acquisitions.
The commission from the sale of a property, and later letting the property, are just part of the potential revenue streams available.
Many mortgage lenders and brokers will also pay a referral fee of typically £100 to £250 for any business generated by an agent.
“The fact that all the big estate agency firms have in-house mortgage brokers shows that they recognise that mortgages are a big money-spinner,” said Alastair McKee, Director at One 77 Mortgages, who estimates that about 50 per cent of a mortgage broker’s business will typically come from agents.
Bridging the gap
More rental investors are also now turning to costly short-term bridging loans, which can provide funds within 24 hours, to help buy property. This also presents agents with the potential to earn additional revenue through referral fees from bridging firms.
“The market is very buoyant,” said John Waddicker, Director at Positive Commercial Finance. “Our clients are predominantly investors and developers who require non-regulated bridging loans.”
Bridging can be appropriate in a wide range of circumstances, but it is most commonly used in the residential sector to acquire homes at auction due to the very quick turnaround of purchases and the speed at which bridging finance can be implemented.
“Bridging finance can be a great solution when the client needs to move quickly to secure a property,” said Chris Baguley, Director at Auction Finance.
Insurers offer a wide selection of property related policies, including landlords insurance, which differs from standard home insurance, something that all buy to let investors should have.
“Renting out property is never going to be a risk-free activity,” said Eddie Hooker, CEO of Total Landlord Insurance. When dealing with clients, agents are generally not allowed to advise their clients regarding home insurance because they are not authorised by the Financial Conduct Authority (FCA). However, they can act as an Introducer Appointed Representative, enabling them to potentially refer business to a broker, earning a referral fee from the insurance company in the process.
Agents can earn money by making referrals to FCA regulated firms. Steve Jones, Managing Director, Rentguard
“While agents cannot sell insurance, they can certainly earn a lot of money by making referrals to FCA regulated companies,” said Steve Jones, Managing Director of Rentguard Insurance.
Aside from helping landlords to better protect themselves there is also an opportunity to help tenants reduce risks by referring them – for a fee – for appropriate tenant-related insurance policies.
Andy Halstead, CEO at Let Alliance, said, “By insuring their own belongings and also including cover for accidental damage to the landlord’s property [tenancy liability cover], this could save tenants losing their deposit.”
Helping investors acquire investment properties may also lead to a rise in the number of rental homes that your firm manages, with a management fee of around 5 per cent typically achievable, as many part-time, or otherwise busy investors, seek hands-free investments.
As more landlords are investing in their portfolios our members report increased supply. David Cox, Managing Director, ARLA
ARLA’s latest quarterly report, for instance, reveals an increase in the average number of buy to let properties managed by ARLA Licensed members towards the end of last year, from 135 properties in the third quarter (Q3) to 148 properties in Q4. “With more landlords investing in their portfolios, ARLA Licensed members have reported a growth in supply,” said David Cox, Managing Director of ARLA.
With many investors actively planning to add to their property portfolios, there is a significant percentage of repeat business that could potentially come from supporting them in their quest to acquire more homes, helping to boost your firm’s income streams in the process. Good news for everybody!
- One 77 Mortgages www.one77fs.co.uk
- Positive Commercial Finance www.positivecommercialfinance.co.uk
- Auction Finance www.auctionfinance.co.uk
- Total Landlords Insurance www.totallandlordinsurance.co.uk
- Rentguard Insurance www.rentguard.co.uk
- Let Alliance www.letalliance.co.uk
- PropertyLetByUs www.propertyletbyus.com
- National Landlords Association www.landlords.org.uk
- Sequre Property Investment www.sequre.co.uk
- Castle Estates www.castle-estates.co
- Platinum Property Partners www.platinumpropertypartners.co.uk
- Barbon Insurance Group www.barbon.com