Mark Graves is managing director of Linear Mortgage Network
Interest rates are on the rise because the rate of inflation is not stabilising. Meanwhile, house prices are rising and first-time buyers are all but extinct – certainly those in their early 20s, anyway.
You don’t need to be Sherlock Holmes to deduce that this is due to buy-to-let investors pushing up prices. The question is not if but when rising interest rates will slow down first-time buy-to-let investors. Hopefully, the latest base rate rise will give potential investors a reality check because until it does, interest rates will keep rising.
Similar concerns should also be on the minds of portfolio investors who use paper equity to increase their property purchases. A large proportion of the buy-to-let market is based on revaluing existing portfolios. Therefore, it stands to reason that a slowdown in the housing market will hit this sector harder than any other.
The strong demand holding up rental income means it’s not all doom and gloom. But with most investors only covering their costs with rental income, it is growth in equity that is driving the market.
It remains to be seen what effect a 10% reduction in house prices would have on the buy-to-let sector, if any. I doubt whether this would reduce the number of housing transactions. In fact, we may see a flurry of activity, with investors who are feeling exposed putting some if not all of their properties on the market.
This will be good news for first-time buyers – remember them? I am reliably informed they are still lurking around somewhere, ready and waiting. Investors have beaten them at every turn in the past year or so but maybe the market has peaked and things are finally turning in their favour. If this is the case, it will be to the detriment of buy-to-let investors.
David Whittaker is managing director of Mortgages for Business
In terms of the wider housing market, a 0.25% base rate rise seems unlikely to dampen demand. In the South-East and London there is a shortage of supply and strong City bonuses are driving capital appreciation.
The market is likely to see a more marked impact if the base rate rises to 5.75% in August as many pundits are predicting. Rents have failed to keep pace with recent base rate rises, making rental cover more difficult to achieve.
Rental cover difficulties are the main catalyst for change and 100% cover products are increasingly common. Income-based buy-to-let products are also becoming more popular, with offerings from lenders such as Platform, The Mortgage Business and DB Mortgages. Rooftop Mortgages has pushed the envelope further by offering products that only require borrowers to have 12-month mortgage records on one residential and one buy-to-let property.
Tightening rental yields are unlikely to dissuade investors, with most viewing capital appreciation as their main source of profit, but this may cap what they can borrow. The Association of Residential Letting Agents says only 5% of investors are solely seeking rental income.
To beat tougher rental calculations, experienced landlords may look at traditionally higher yielding properties such as houses in multiple occupation and flats over commercial premises.
Our recent business volumes have seen spikes when interest rates have risen as investors switch to fixed rates. Lenders are reacting to this by offering competitive headlines rates with heavy arrangement fees. Buy-to-let lenders are honing their criteria to cater for landlords’ needs, thereby reducing the impact of base rate increases. The question is how long they can maintain this stance if the base rate moves again.