Rental demand is up but buy-to-let funds get tighter

4 October 2010

It is not unusual for good news to come hand in hand with bad. This is the case for landlords who will be pleased that rents are rising but less thrilled that the tight lending market seems to be getting worse.

Rents have risen to levels not seen since the start of the economic slowdown, according to LSL Property Services’ monthly index of buy-to-let rents.

The South-East saw rents rise by 2.8% in August, while London saw a 2% increase.

With property prices falling in looking muted, sound returns on rental income will be welcome.

The increase in rents is due to a big rise in demand as would-be buyers struggle to get mortgage finance so rent for longer.

There are also fewer accidental landlords as more of those who rented for a time have taken advantage of improved market conditions and sold those properties.

But it’s not all rosy for landlords. Lloyds Banking Group, one of the biggest suppliers of investment funding, has announced that it is tightening its criteria.

It will only allow three properties per landlord or a maximum £2m worth of lending. Previously borrowers could take out nine mortgages with a total value of £3m across the group’s brands.

The question is whether brokers can help landlords refinance unless lenders get their lending appetite back

This will come as a blow to smaller landlords having properties with modest values.

There is so little choice anyway when it comes to buy-to-let mortgages and this isn’t going to make it any easier. We need more lenders coming into this market, not those with a strong track record pulling out.

While this is a problem for smaller landlords, there are still plenty of options for large portfolio landlords and those with properties having an average value in excess of £2m.

There is an opportunity for brokers who will be able to advise on how to restructure existing portfolios or raise more finance on competitive terms, usually with private banks, which are flexible and can offer tailored products.

For example, we have just arranged funding via one of the private banks for a Russian client on a £13m investment property at 3% over Bank of England base rate.

For landlords with more modest properties, the saving grace is low interest rates. But while the lack of remortgage options is not an issue at the moment, this won’t always be the case.

Landlords may be happy to sit on their lender’s SVR, which is much cheaper than anything they could remortgage on to, but when interest rates start to rise and they cast around for a product to switch to it will be difficult.

There is a fair chance brokers will be inundated with requests for assistance in refinancing buy-to-let properties.

The question is whether there will be anything they can do to help landlords unless lenders rediscover their appetite for buy-to-let.

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