Never mind high LTVs, B2L is still a long-term game

Easier criteria won’t help landlords unless they think about the cost of their investment over several years


I was pleased to see the return of higher LTV buy-to-let rates recently, as The Mortgage Works launched its 80% LTV range.

But the high prices required to cover risk at higher LTVs could prove incompatible with the rental yields on offer to landlords.

TMW’s trackers are as low as 4.69%, with a range of fee options and fixed rates available.

The longer-term fixed rates are likely to be most popular, and a three-year fix is available at 5.99% with a 3% fee. and Yorkshire Bank have had 80% LTV buy-to-let offerings available to direct customers for some time.

It is understandable that rates for these sorts of deals need to be higher than residential property offerings.

Figures from the Financial Services Authority reveal that the level of arrears on high LTV buy-to-let deals is more than three times that on high LTV prime residential mortgages.

But overall, the risk involved in lending to landlords is decreasing. The Council of Mortgage Lenders reported recently that the repossession rate on buy-to-let properties in Q4 2009 was some 13% less than in Q3.

So a high LTV banding may seem to be a niche begging to be filled at the moment but if the price is not right demand will be low.

The secret of a successful buy-to-let operation has always been to take a longer-term view. This now involves sacrificing a large deposit to the cause and allowing several years for equity to increase.

If a borrower can give a property time to rise in value it could outperform the investment alternatives

Latest figures from Halifax show a monthly 0.1% drop in property values and the outlook generally is for an uneventful year.

LSL Property Services’ buy-to-let index shows an average 7.6% overall annual return on property in 2009.

Taking TMW’s range as an example – and by no means singling the lender out for criticism because at least it is lending – a three-year fixed rate of 5.99% with a 3% arrangement fee aggregates at a cost of 6.99% a year on the 80% of the property that is borrowed.

Not only will landlords struggle to meet the rental requirements for affordability but they will barely break even each month after their other costs are taken into account.

Surely, such a deal could only work for borrowers who are receiving unnaturally high rental income compared with their property value.

The landlords who are succeeding in our depressed property market are the ones who have considered the overall cost of their investment.

It is vital that they can absorb the risk of raising capital on a residential or buy-to-let property.

Gearing single properties up to the hilt is no longer mathematically viable, but if a borrower is able to put in a large deposit and allow a property time to appreciate in value, it could outperform the investment alternatives while cash savings returns are minimal.