Independent review and analysis

An investment opportunity or millstone?

Research shows that there has been a 184% increase in the availability of buy-to-let (BTL) products over the last six months.

Another recent survey revealed that 74% of mortgage intermediaries felt that BTL investments would provide attractive returns over the next five years. Their enthusiasm to ‘talk up’ this sector is understandable, with many self-certification or sub-prime customers unable to move house or re-mortgage because of the lack of products available. As a result, the BTL sector, where there is product availability, looks attractive.

After the crash we saw a tightening of criteria in many areas of credit assessment, one being BTL rental cover. We moved from a market where some lenders were offering 100% rental cover on prime business and 110% on sub-prime, to a situation where 130% became more usual.

Interestingly the drive to increase market share is seeing more lenders offering 125% rental cover again, obviously too early to suggest a loosening of criteria, but worth consideration nonetheless.

While reducing rental cover criteria may at the outset appear attractive to both lenders and investors, they are both taking a huge gamble. Although the ‘jury is out’ on when interest rates may change, it is generally accepted that the next move will be upwards.

Consider this simple calculation: – Take a rental cover of 125% based on current rates, factor in a 1% increase in interest rates and a one month void period during a year. Result? The rent doesn’t cover the mortgage interest charge. Food for thought for buy to let lenders and investors…

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