Property investors hoping to take advantage of rock-bottom house prices are finding the cost of new buy-to-let loans prohibitively high.
While the price of residential mortgages has fallen rapidly in recent months, buy-to-let rates have remained expensive, while fees have increased. Some lenders are now charging fees of thousands of pounds for mortgage rates that last only one year and are still at a high premium over the base rate.
At the same time, criteria is extremely tight. Landlords are having to put down at least 25 per cent in cash to qualify for a new mortgage deal.
“Two years ago, lenders were increasingly moving into the booming buy-to-let market as they claimed they couldn’t make a profit in the prime residential market,” says Melanie Bien, director of Savills Private Finance, the broker. “The credit crunch has changed all this. Landlords looking to expand their portfolios by picking up a bargain, or remortgage, are in for a shock.”
Figures out yesterday from the Council of Mortgage Lenders (CML) showed that new buy-to-let lending fell for the sixth consecutive quarter in the first three months of 2009. The CML said this reflected the “continuation of extremely challenging funding conditions as well as general housing market weakness”. Buy-to-let lending accounted for 6 per cent of all mortgage lending in the first quarter, compared with 12 per cent last year.
Several buy-to-let lenders have pulled out of the market, leaving only a handful that include the Lloyds Group brands, BM Solutions, Bank of Scotland and Cheltenham & Gloucester as well as Godiva, which is part of Coventry Building Society. The Mortgage Works, owned by Nationwide, is also still lending although it withdrew many of its best fixed rates last night.
“Buy-to-let has taken a big step backwards,” says Bien. “No longer is a 10 or 15 per cent deposit acceptable – landlords need at least 25 per cent and as much as 50 per cent for the best rates – and fees are astronomical.”
Landlords can generally expect to pay at least 2 per cent of the loan in fees and as much as 3.5 per cent on the best rates. Some lenders offer flat fees but the rates on these loans tend to be higher. NatWest, for example, has a two-year fixed rate of 6.79 per cent with a £1,499 fee for loans of up to 75 per cent of a property’s value.
Some of the best rates are only available for one year. The Mortgage Works has a tracker rate of 2.75 per cent over base rate until May 2010. This carries a 3.5 per cent fee even though the rate could jump next year.
Fixed rates tend to be more expensive. The Mortgage Works has a two-year rate of 4.49 per cent with a 3.5 per cent fee, while C&G offers a three-year rate of 4.99 per cent with a 2.5 per cent fee.
The high costs are making it difficult for landlords to switch to a new mortgage deal and many are having to stay with their existing lenders. With interest rates so low, landlords may find it beneficial to switch to a variable rate – typically around two percentage points above base rate – when their fixed deal expires. But brokers warn they could face problems when interest rates rise.
