08-05-2007
Landlord rate rise concerns - are they justified?
The Bank of England's decision to raise the base rate to 5.25 per cent in January 2007 has led some would-be landlords to question whether or not it is a good time to enter the buy-to-let market.
As a result of the decision, mortgage lenders will be raising their rates in order to pass on the extra cost of borrowing and property owners will therefore find their monthly repayments increasing.
When asked about the impact the third interest rate rise since August 2006 might have on the buy-to-let market, Malcolm Harrison of the Association of Residential Lettings Agents (Arla) admitted that the increases were resulting in "a 'drip-drip' principle that makes people wonder about affordability".
"Having said that," he continued, "most buy-to-let investors actually do their sums quite carefully, give themselves a cushion and work it out according to the interest rates. What they have to do, if they're thinking of investing in a property today, is to allow for another interest rate rise this year and work our their mortgage according to estimation and work out if their rent is going to be enough to cover that."
One of the most important things for those considering becoming a landlord to remember is that the mortgage isn't the only cost involved. As Mr Harrison explains, "They have to cover insurance, maintenance, agencies and all the other things. In other words, are their mortgage payments going to be covered by about 120 per cent, because that amount reflects all their costs. If that stacks up, then they will have a worthwhile investment. If not, they should walk away."
Although the rate rise is likely to affect confidence in the property market, Arla is confident that existing landlords who are experienced investors will not be adversely affected, especially when demand is taken into consideration. The spokesman notes: "If someone is finding it hard to buy a property to live in, then this is going to increase the rental market.
"You're certainly not going to suffer on the demand side from tenants, so although increased interest rates may knock confidence in the short-term, there shouldn't be any difference to the responsible buy-to-let investor."
There seem to be few serious concerns over whether or not buy-to-let investors could find themselves unable to make their mortgage repayments. But, with borrowing costs higher and outgoings therefore more substantial than previously, is buy-to-let still a worthwhile investment?
In the Arla expert's opinion, the market is still definitely worth investing in. "From the surveys that we do every quarter, we have seen that the prime reason that people invest in buy-to-let is not for the income, but rather for the capital gain over a long period," he revealed. "All they're really looking for is to ensure that they are washing their face."
