Buy-to-let market 2007 preview

The buy to let market remained strong throughout 2006 and looking forward to the New Year it is likely to remain strong, according to independent buy to let brokers Mortgages for Business review of the year to come.

David Whittaker, Managing Director of Mortgages for Business comments: “The main pressures on the buy to let market in 2007 are likely to be from further interest rate increases and the Government’s decisions on whether to finally implement initiatives such as the seller’s pack and the tenancy deposit scheme”.

Mr Whittaker continues. “The buy to let market is increasingly attracting new specialist lender entrants as it continues to grow and it now represents 8% of all UK mortgage transactions and has £83.9 billion of loans outstanding. This growing competition will lead to further improvements in mortgage products as market demand forces lenders to improve their terms. This could be manifested in headline rate improvements and by lenders lowering their rent to interest cover calculations. Rent to interest cover calculations criteria are likely to be lowered, as many economists believe interest rates could rise again in the first quarter of 2007”.

Other financing developments will include the widening prevalence of the 90% loan to value buy to let mortgage, meaning deposit requirements will drop to 10%. As a consequence landlords’ capital will go further giving the opportunity to make additional property purchases.

Residential property capital appreciation in 2006 is likely to be on average approximately 8.5%, again confounding critics who believed the housing market was set for a fall. However these pessimistic views are likely to still be around in the marketplace in 2007, but the growing demand for rented property from young adults and new EU immigrants makes this unlikely.

Recent data from the Home Office estimates 145,000 average immigration each year. Additionally the lack of new housing in areas such as the South East makes a drop in demand implausible. Capital appreciation is likely to be particularly strong in London and the surrounding areas as a result of a bumper year of bonuses fuelling house price growth.

There has been increasing speculation and calls in some quarters for the buy to let market to become FSA regulated, in the same way as the residential mortgage industry. However, it seems likely that the Government will continue to treat buy to let as a business transaction and therefore will leave the market as unregulated.

From 6th April 2007 the government plans finally to introduce the tenancy deposit scheme which was due to have been implemented on 1 October 2006. This will be operated by three companies – Hamilton Fraser and Dispute Service Limited will run the insurance based schemes, and Computershare Investor Services will run the custodial scheme. The scheme aims to provide a third party arbitrary body to resolve disputes relating to deposits. The scheme will have an impact on all landlords who operate assured short hold tenancies, which will be the vast majority. Students and DSS landlords are likely to be the most exposed to the new scheme, but organisations such as mortgage lenders seem unlikely to change their lending terms based on this initiative alone.

The seller’s pack or HIP (Home Information Pack) is expected to become mandatory in June 2007; some analysts believe this could cause a flurry of sales to avoid vendors having to meet the cost of them. However conversely others believe the HIP could allow first time buyer to get on the ladder more easily and therefore fuelling growth in the bottom end of the marketplace.