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If we are to determine whether buy-to-let is doomed, if not irrevocably changed as a result of the credit crisis, it is sensible to look at the past, present and future. With the credit crunch now in its second year and constant media reports on the failings of the property market, it would be easy to become despondent about the prospects of your buy-to-let portfolio. However, the old saying that ‘every cloud has a silver lining’ could ring true in the buy-to-let market as new investors look set to cash-in on the falling house prices and the influx of new tenants that cannot afford to buy themselves. The Past The drop in house values will most likely impact existing landlords especially if they took the maximum loan to value at 85% or even 90% when they originally purchased the property say 12 months ago. However, these lower values will aid new investors in their quest for rental properties and will open the door for those that might not have been able to consider property as an investment in the past. The problem we had last year was that values were increasing by a much higher percentage than rental yields, so if a lender wanted the rent to cover the mortgage payment by 125% on an 85% loan to value mortgage, it just wasn't stacking up. As it’s now harder for first time buyers to get on the property ladder due to the lack of low or no deposit residential mortgages, an increasing number are looking at renting which is increasing demand and therefore the prices landlords can charge, which will also help. One further stumbling block was the high rates on buy to lets in recent months, which again affected the rental calculations, however in the past few weeks we have seen buy to let rates dropping to as low as 5.69% (BM Solutions) so that can only be good news. This will aid new landlords and those taking advantage of lower house prices to expand their portfolio, although of course it doesn’t help existing landlords. The Present Now certainly isn’t a good time to be a buy-to-let landlord with a large portfolio, especially if they borrowed at 90% when the market was booming two years ago. It's likely they could have a portfolio in negative equity if prices do continue to fall and this could be the biggest problem for previous buy-to-let investors. However, it is not all doom and gloom in the buy-to-let market as many estate agents are finding their letting departments busier than ever from tenants coming off the property ladder or struggling to get on in the first place. If landlords can secure a competitive rate for their buy-to-let mortgage then there is no reason why they should fear the market and they could enjoy a higher return on their investment as rental prices continue to rise with demand. The future As people’s faith in the property market worsens many homeowners are struggling to sell their properties and as a result they are turning to the rental market in a bid to move quickly. This is increasing the supply of new rental properties to the market which may begin to affect the return on investment as competition will be higher and landlords may be forced to lower their prices. For the time being, demand is exceeding supply for rental properties. However as with all investments, landlords will have to assess the long-term returns on their investment in order to decide if buy-to-let is right for them. We would always advise clients to spread the risk in their investment portfolio and the same applies to a buy-to-let investment. For many, this investment in property is intended to act as a nest egg for their future retirement, but this can be a risky strategy if clients put all their eggs in the property basket at the expense of other options such as a pension. If for nothing else, a pension can offer a welcome tax relief to contractors and can represent a lower risk investment for their retirement. In summary, buy-to-let can still represent a worthwhile investment opportunity despite media speculation about the effect of the credit crunch. However, as with any investment it is important to calculate the risk involved and if the property is destined to fund your retirement then it might be sensible to back it up with a contractor pension just in case. Emma Chainey is a mortgage advisor with independent financial advisory Contractor Money . For a quote fill out our form here. Aug 28, 2008 Email this article Printer friendly page Previous Page
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