Since the beginning of 2014 there have been hundreds if not thousands of new stories discussing the current state of the UK’s property market. Much of this discussion has been caused by the fact that the UK economy is slowly recovering from the recession, and as such more and more people have been investing in property leading to prices increasing across the country.
However, even though many experts claim that the UK’s economy is improving, there are still those that argue that most people are struggling due to the high cost of living. This has led to many landlords wondering the same thing: “Is now a good time to invest in a new property?” Unfortunately, there is no simple answer to this question as there are a number of issues that could change both the property and private rental markets in the near future.
For example, just last week it was announced that the Financial Conduct Authority (FCA) had created a new set of criteria that lenders must now use when considering mortgage applications. The Mortgage Market Review (MMR) is designed to prevent lenders from providing mortgages to those who may struggle should the economy turn again. This means that lenders will now look at the outgoings of each applicant, including subscriptions and childcare fees, in order to determine whether they could truly afford their monthly repayments even during times of financial difficulty.
Martin Wheatley, the chief executive of the FCA, said: “The core principle is a very sensible one – lend to people what they can afford to repay. We’ve come out of a period, particularly in 2008-09, when there was no attempt to verify people’s ability to pay, and we’ve ended up with lots of payment problems, lots of people in mortgages that are problematic for them, and if we had a different interest rate environment we’d see a lot of foreclosures.”
Unfortunately, the introduction of the MMR has led to a number of lenders pulling out of the buy to let mortgage market including NatWest, Coventry Building Society and Clydesdale Bank. However, buy to let mortgages are not regulated like mortgages for individuals, meaning that the MMR may not make it any harder for landlords to have their applications approved. In fact, recent reports have shown that buy to let investors have made £12,000 for every £1,000 they have invested in mortgages since they were launched in 1996.
Rob Thomas, author of the recent report and director of research at Wriglesworth Consultancy, said: “We believe this is the most detailed analysis of long-term buy-to-let returns undertaken to date. It should be invaluable for investors seeking to understand the relative performance of different investments over the longer term and shows the outstanding average returns enjoyed by buy-to-let investors over the past 18 years or so.”
However, the report has also led to critics claiming that landlords are pushing individuals out of the property market, such as Alex Hilton, director of Generation Rent, who said: “While a 16.3% annual profit makes the UK buy-to-let market a hugely lucrative investment for landlords, it’s time to count the cost to their captive tenants. It drives up rents and kills the dream of home ownership for millions of tenants, but worse than that, our ComRes poll in March showed that a third of tenants are cutting back on food and two fifths are cutting back on heating – just so they can pay their rents.”
The issue of tenants struggling to afford their rent payments may also be exacerbated in the near future when the Bank of England increases their interest rates. In order to make up the difference on their monthly mortgage repayments it is expected for many landlords to increase their rent prices, putting more pressure on those that are already struggling with the cost of living. So is now a good time to invest in a buy to let mortgage? With the returns so high it seems as if you would be mad not to, however at the same time it is likely you will have to handle the increasing likelihood of tenants falling into rent arrears.
It is therefore important for all landlords to protect their businesses with a landlord insurance policy that includes rent guarantee insurance, as well as have a contingency fund in place in case they struggle to cover the costs of increased mortgage repayments or tenants defaulting on their rent payments. Investing in a buy to let mortgage should always be something you consider thoroughly before signing on the dotted line, especially as the private rental sector could change considerably in the near future.