Credit crunch starting to bite the buy to let sector

Julia Harris, Mortgage Expert at Moneyfacts.co.uk, comments: “While the prime residential sector has so far been largely unaffected by the sub prime crisis, the buy-to-let sector is beginning to show signs reminiscent of the subprime market over the last few weeks with tightening credit criteria, the withdrawal of products and rising fees.

Tightening of credit criteria

“The most obvious change comes by way of amending the minimum rental cover required, effectively raising the minimum rent required to cover a given mortgage repayment, either by raising the cover percentage, increasing the underlying rate or withdrawing the lower cover products. The trend over recent years has been a falling rental income cover requirement, so with lenders reversing this trend, it’s a definite sign that some are taking a more cautious outlook.

Withdrawal of products

“Some lenders have withdrawn their entire range of buy-to-let products while many others have simply withdrawn their tracker or variable range. Perhaps lenders are just taking a breather, giving them time to evaluate the market and perhaps relaunch with re-priced products, which will more than likely be at a higher rate.

Fees increase and reach new highs

“While fee increases are not a new trend, the volume of changes and the size of fees have reached new levels. With the margins to be made on interest turn now becoming minimal, fee income is a key source of revenue for lenders. While percentage fees are commonplace in the buy-to-let sector, the 5% fee from Paragon sets a new precedent.

“The ease of availability, choice of products and cost of buy-to-let products seem to be taking a battering at the moment, but look hard enough and there are still some very competitive deals to be found. However, establishing the true cost of any mortgage is a must, with a vast range of high fee low rate combinations currently available.

“The outlook may not be all doom and gloom for the buy-to-let landlord, although borrowing costs are rising, yields are beginning to fall and the potential to gain from capital appreciation is declining. If the residential mortgage market sees increasing arrears, repossessions and first time buyers continuing to be priced out of the market, the demand for rented properties will undoubtedly increase.”