The Young Index sentiment survey results published recently reveals that landlords and property investors expect rental rates to stay buoyant during the coming year. However, the investors would like to see one important difference in the new year: better availability of mortgage finance.
Their wish might just come true. The prospects are good for improved availability of buy to let mortgage finance in 2011. This is the view of Paragon, which was the third biggest lender in buy to let market shortly before the credit crunch.
Paragon believe that gross lending advanced to the buy to let industry during 2011 will be significantly higher than levels at year-end 2010. Nigel Terrington, Paragon chief executive, points to continued strength in tenant demand, with the announced changes in social housing policy serving as a primary stimulus for growth in the buy to let market.
Mr Terrington says: “Gross lending will rise steadily during 2011 and, in the absence of any major economic downturn, should finish between 10 per cent and 15 per cent higher than 2010 levels. However, it will be some time before we see levels of lending that are consistent with ‘normal’ market conditions.”
The lender also thinks the market for Houses in Multiple Occupation (HMO) is poised to expand. This will lend to more complex borrowing needs of buy to let investors interested in HMO purchases. Consequently, the demand for specialist advice from commercial brokers may also increase.
The buy to let mortgage specialist expects that new lenders will be encouraged to enter the market during the year, bringing the numbers up from the current 54 active lenders. This may bring some degree of overcrowding and stiffer competition, especially as many small lenders jostle each other to compete for a foothold in the market.
It is also possible that new entrants into buy to let lending will stay away from the professional well-organised landlords and instead concentrate their efforts on small landlords. Mr Terrington warns about the dangers in the technique of some lenders to assess only a borrower’s ability to afford mortgage payments on a short-term product rate. This is applicable only in a low-interest rate regime, but it poses a lot of risk when the inevitable rise in interest will occur.
The Paragon chief executive makes the distinction: “Risk and affordability is not the same thing.”
Paragon’s chief executive also forecasts good returns to landlords in the coming year, as average void periods get shorter and rental rates go higher, making for improved yields.
But although rising rental rates have brought some cheer to landlords, they also need to be wary about rental arrears. Current tenants could face unemployment, whilst many tenants are also choosing not to pay rent as they try to cope with economic difficulties.
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With the buy to let market on the rise it is inevitable it would run into 2011. However with house prices increasing it may be more difficult to get one.