Is Buy-To-Let A Good Bet In 2013

Demand for rental properties is set to continue to increase in 2013 with four in 10 landlords predicting rises, according to a recent poll.  The LSL Property Services landlord survey from December shows that for every investor who expects to lower rents, 39 expect to increase them.

Of the 1,223 landlords polled for the survey, 10 per cent are anticipating greater than 5 per cent rises.

It follows last month’s report by the Association of Residential Letting Agents predicting demand to significantly outstrip supply for landlords in 2013.

As house prices have rocketed in the last decade home ownership has become more difficult for young people to achieve.

Statistics from the Council of Mortgage Lenders show the average age of a first-time buyer standing at 33 and rising. Deposits are tough to raise, mortgages are hard to obtain and houses are expensive. Many are being forced into renting, particularly in areas where homes are expensive such as London and the south-east. Tough mortgage conditions are dovetailing with demographic trends to boost the UK buy-to-let mortgages.

Whether it is the greater desire for flexibility young people, immigrants needing housing or a growing student population renting has been the answer over the last decade.

These trends create a huge opportunity for private landlords and boosted demand form tenants, pushing up rents and creating huge opportunities for good returns.

How do I become a landlord?

The potential profit to be made by entering the UK buy-to-let market in 2013 is clear but how do you get started?

Aspiring landlords will need to choose a property that can be rented with a specific target in mind. It could be students, young people or even families. The next step is to get your hands on a buy-to-let mortgage, which operate quite differently to your normal mortgage.

Firstly, you will need to raise a deposit. The level of deposits required for buy-to-let deals has relaxed in recent years but the barrier to entry is still high. The minimum deposit will be 15% of a property’s value and such deals remain rare with most lenders requiring deposits of 25% to 40%.

It is also worth bearing in mind that the lower the deposit raised the higher the interest rate you will pay for the privilege.

Secondly, the affordability criteria is not based on your own personal salary but on the ability of the house to generate rental income. Lenders will have ways to evaluate expected rental income and this should be the basis of your application.

Which lender should I choose?

For amateur landlords with two or three properties the main players are BM Solutions, part of Lloyds Banking Group, and The Mortgage Works, part of Nationwide Building Society.

Between them these two lenders take up the lion share of buy-to-let lending in the UK. They can offer good rates but as the biggest can be more inflexible than the smaller, specialist lenders.

But in the last two years a growing number of banks and building societies have entered the market as a result of growing tenant demand.

Banks such as Santander  and Barclays are making the market more competitive and pushing down rates along with prominent building societies such as Skipton, Yorkshire and Coventry.

Amateur landlords now have a wide choice of lenders to choose from and a good mortgage broker can compare the costs and criteria across the market.

There are also specialist lenders such as Paragon Mortgages who cater for professional landlords with a number of properties. Paragon will only deal with professionals and not the amateur landlord with one or two properties to rent.

Is it worth it? 

Getting a buy-to-let mortgage is much easier than it was a few years ago with a growing number of lenders offering 15% deposits. More lenders is also creating less stringent criteria and better rates.

As a landlord there is always a risk of void periods, when no rent is received, but the mortgage payments still need to be met. There are also maintenance costs and potential drops in property prices.

A buy-to-let mortgage is an investment product and should be seen in the context of the associated risks. But the UK property market has weathered the storm well on property prices and rental yields are strong making buy-to-let a potentially good bet for 2013.