Paragon may stop lending to new borrowers because of credit squeeze says Letting Focus

Buy to let mortgage specialist Paragon has said it may have to stop lending to new borrowers because of the credit squeeze. Paragon raises all its cash on the money markets not from savers and so it has been caught out by the crunch.
It has taken some products off the market and increased the prices on others.
As Paragon has no savers it cannot turn to Mr. Darling for help and has indicated it may raise money via a rights issue – issuing new shares to raise cash.
If this does not happen there will be doubts about its future – just as there were in its previous incarnation as National Home Loans back in the late 1980s – when it was last bailed out.

New Mortgage Rates
However, existing buy to let investors with loans from Paragon should not be under threat - though they may find Paragon’s new rates not to their liking when they need to re-mortgage.
Paragon is one of the largest lenders in the residential property investment sector, funding one in every ten buy-to-let loans. In general, it has tended to avoid new build flats, so it’s lending book may be attractive to bidders.
All this news is grist to the mill of newspapers that have long (very long) predicted the demise of buy to let. They are fond of saying that the falling number of buy to let loans and their rising cost could force some investors to sell.
And they reported with glee that no less an august institution than the Royal Institution of Chartered Surveyors has predicted that buy to let is set to become the preserve of the wealthy.

Preserve of the Wealthy
RICS has recently released figures suggesting that to purchase a buy-to-let property you now requiore a deposit of about £65,000 – effectively 30 per cent of the property’s value. They say five years ago, the required deposit was £10,000, or 8 per cent of the value of an average-priced property in the UK.
But whilst in theory borrowers needed to stump up only 8 per cent of the property value, the lending criteria in 2002 were much tighter, especially the rent to interest ratio which meant that lenders actually required investors to put down a deposit more like 15 or 20%.
So, I don’t share the pessimism

Buy in the Right Area
Buy in the right area and the right kind of property and you should do well - even if property prices do take a tumble over the next 18 months or so.
And as defaults in buy to let are still lower than the rest of the mortgage market, I don’t expect lack of credit will be a problem for long.
And despite what RICS says, there are still plenty of properties on the market, even for new-build flats, for which a 20 per cent deposit is (for now at least) perfectly satisfactory for most lender.

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Buy to Let Yields are Good and So is Growth if you Buy in The Right Area and Right Type of Property

I’ve just received the latest set of data from Paragon Mortgages on landlords and how they are doing.
Now the data has to be treated with some degree of caution because it is based just on Paragon’s survey. However, it is fascinating nevertheless.
It seems that following the MPC's second increase in interest rates this year and the fourth since last summer, landlords are responding by increasing rents by more than CPI inflation and by adding to their portfolios of buy-to-let properties.
According to Paragon, average rents on a typical buy-to-let property have risen by 6.5% over the past quarter, from £9,942 in January to £10,591 in April. This compares with an increase in CPI inflation over that period of less than 1%, even taking account of last month's sharp rise in inflation.
I too have also seen strong rises in rents in my patch in London and Kent.
Paragon say that yields are averaging about 6% overall. But be careful here because they are talking gross yields.
I would say you need to take between 1 and 1.5% off to get to yields that are net of running costs. Still, that’s not bad compared to dividends in the FTSE where only a few big firms are still paying much over 4%
The big question is where will prices of houses go next and how will this compare to capital growth on the stock market.
And that’s a big question.

Bumpy Years Ahead
I think there could be a bumpy few years for property but at worst I think prices will fall 10%. But buy in the right area and avoid areas that are hugely oversupplied and you will still do well.
New flats in some of the Northern English towns aren’t my idea of a good property investment – those of you who read my stuff will already know this.
As Paragon’s figures show, terraced houses continue to generate the highest yields, roughly a whole 1% more than flats.
So get houses in the right place where strong tenant demand exists and you will be OK.

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