The Future for Buy to Let Loans and Mortgages
Whilst one or two new lenders have appeared on the blocks in the last quarter of 2010, the overall picture of availability of mortgages in the world of buy to let lending still looks pretty subdued.
It is not so much the level of interest rates (which are low by historic standards) that is the problem. Rather, it is the high margins over base rate, the high level of deposits needed to get a half decent rate and the high “application fees” that are the stumbling blocks.
One of the cheapest lenders is the Bank of China (BOC). They have a variable rate of 3.38% over base rate (i.e. a current pay rate of 3.88%) for life, an arrangement fee of £1,695 (subject to loan amount) and a valuation fee of £275.
I like the low arrangement fees with this deal and the valuation fee is below what most other lenders charge but, even with this mortgage, the margin on the “follow on” rate is 3.38% above base which will mean a landlord will have to consider very carefully what happens if base rates rise (as they surely will.)
Sure, an alternative is to take out a fixed rate, but all fixes are limited in time and sooner or later landlords will end up on the lender’s standard variable rate or a follow on rate anyway.
But what I really like about the BOC deal is that at least they are pegging future interest rates for to the Bank of England Base rate.
A few other lenders still do this but increasingly lenders are setting the “follow on rate” for buy to let mortgages at an arbitrary Standard Variable Rate (which is usually not itself linked to Bank of England base rate.) In other words you are at the mercy of the lender in the long term – i.e. once the initial discounted or fixed term deal has ended.
I don’t like this trend at all and unless the alternative is a great deal with a big provider whose mortgage pricing I can trust to not be too wildly out of line, I will always prefer to plump for a rate where the follow on rate is linked to the BOE base rate because at least that way I get some certainty on rates over the time horizon of the mortgage.
Talking of rates, the Council of Mortgage Lenders (CML) has said that from April next year onwards, lenders will begin to have to repay the funding advanced through official support schemes. This is likely to limit the availability of credit to support mortgage lending next year and beyond.
This will not be good news for any borrower – buy to let or residential – and we could see the overall levels of rates rise even more and lending decisions become even tighter.
The CML has also recently taken another swipe at the Financial Services Authority, saying that its ongoing Mortgage Market Review which is intended to herald an era of ‘sensible lending’ (some fear this will mean ‘not much lending’) – “continues to be a major and unhelpful source of uncertainty for the lending industry”.
They also said, “Firms do not know when the FSA will issue firm rules or whether it will modify its current excessively risk-averse approach. This uncertainty will itself reinforce lenders’ caution.”
I have a feeling that the FSA review will not turn out to be as bad as all that and the CML’s words will win the day in Whitehall. Certainly, the government seems to be making noises that would seem to indicate that the FSA should “go easy.” Watch this space!
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LettingFocus.com is the home of Private Rented Sector and Landlord Information and I’m David Lawrenson, a landlord and property investor myself for over 25 years and author of “Successful Property Letting” – the UK’s top selling commercially published property book for the last 3 years. 25,000 copies sold.
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