Estate agent signs going up in Norwood, south London, 13/02/2006.
© Felix Clay

Tenants could find it easier to lock into longer-term rental contracts, after a major lender said it would allow landlords to offer lets of up to three years.

The move by The Mortgage Works (TMW), part of Nationwide Building Society, will help bring greater stability to people renting their homes, particularly families, say experts.

It could also be positive for landlords, said David Lawrenson of Letting Focus, a property consultant. While some may still prefer not to arrange tenancies for longer than a year, many landlords who already know and trust a tenant will like the flexibility that this offers.

Consumer and industry groups welcomed TMW’s decision to remove the restriction on its buy-to-let mortgage that limited the initial length of tenancies that landlords can offer to 12 months.

According to Mr Lawrenson of Letting Focus, lenders have typically chosen to include this restriction to mitigate risk.

“The lenders say this protects them, because, should the borrowing landlord default, it allows them to recover the asset and sell it vacant reasonably quickly,” he said. “But insisting tenancies are limited to 12 months for the initial term fails to address the needs of the modern lettings market – especially the needs of families and retired people.”

David Hollingworth of London & Country said more lenders would need to follow for there to be a real change in the renting market. At the moment, the vast majority of providers only allow up to 12 months, apart from Woolwich, which allows up to two years.

Richard Napier, divisional director of mortgages at Nationwide, said it hopes to expand the choice for renters and landlords. “The private rental sector has grown and changed phenomenally over the past few years, with rising number of families looking to rent. We want our buy-to-let customers to be in a position to meet the changing needs of the market,” Mr Napier said.

Tenants were given additional good news this week as new rental research released on Wednesday showed that rents in Britain are rising at a lower rate than average house prices.

According to the Office for National Statistics’ new private rental index, rents rose by 1.3 per cent in the 12 months to May, which is far below the rate of inflation.

This contrasts with the ONS house price index, which is rising at 2.6 per cent a year. It is also much slower than alternative rental measures, which have indicated rises of more than 3.5 per cent.

However, there was a wide variation in rents across the UK. London prices outpaced those of other regions, rising at 2.2 per cent in the past year. Over the same period, rental prices fell by 0.1 per cent in the Northeast.

Ian Fletcher of the British Property Federation, said the new official statistics brought clarity to the sector.

“Private rents do not rise at the rate that is often perceived, because most landlords do not raise rents every calendar year, but only when a tenant moves on, which is typically every 20 months,” said Mr Fletcher.

Rising cost of landlord loans

Buy-to-let mortgage rates have been rising since May as lenders react to the recent increase in the cost of borrowing from the money markets.

The average five-year fixed rate buy-to-let mortgage has risen from 4.65 per cent on May 1, to 4.75 per cent today. One and three-year fixes have also increased by 75 basis points and 16 basis points respectively, according to Mortgages for Business, the buy-to-let broker.

On Tuesday, Paragon Mortgages became the first major buy-to-let lender to withdraw all of its fixed-rate deals following last week’s spike in swap rates.

Swap rates – typically used by lenders to price the cost of fixed-rate loans – have risen sharply in the past few days after the US Federal Reserve signalled plans to start winding down its programme of quantitative easing.

Five-year interest-rate swaps jumped from 1.35 per cent last week to 1.80 per cent on Monday. They have subsequently fallen to about 1.60 per cent, but remain higher than they were at the beginning of June.

John Heron, director of mortgages at Paragon, said it will look to relaunch its fixed-rate products once swap-rate volatility has lessened. The lender still offers its variable-rate buy-to-let deals.

David Whittaker of Mortgages for Business said buy-to-let rates had, in general, been falling since the beginning of this year, helped by the government’s Funding for Lending Scheme.

“Since the start of the year we’ve seen a reduction in rates for both first-time and professional landlords. However, the FLS is not the only influencing factor on buy-to-let rates. Market jitters are being reflected in the recent rise in swap rates,” said Mr Whittaker.

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