Although many of our clients are taking advantage of the trading gap* many more are falling into the category of Accidental Landlord...
Trading up the property ladder due to the recent falls is obviously very appealing. For many clients, who have cash and/or equity on their side they are able to exploit the drop in prices by trading up now, but also letting the existing property. The result being they are able to realise opportunities but without making losses on their current abode and and also taking advantage of the capital gains exemption on ex-main residences that are let.
There is no doubt that rentals have fallen this year, by as much as 10-15% in some areas, but this is due to the vast majority of landlords being on lower interest rates then they’ve previously experienced, thus being able to drop rent to prevent void periods (although as more people are letting rather than selling their homes, certain areas have suffered due to over-supply). However if the current trends continue there will of course be a shortage in homes to buy so the recovery could be quicker than expected (there are suspicions in some quarters that restricted supply, due to reluctant sellers, has lead to the recent market gains).
Although that could be true in the short term, the overriding demand and supply factors still remain in the market longer term. One unfortunate (or fortunate) effect of the credit crunch has been a restriction on the supply of finance available for developers and therefore numbers of new homes being built has fallen off the edge of a cliff. The government had set exceedingly high targets of 240,000 new properties to be built each year up to 2016 and this year it seems we will be nearly 80% down from the peak of 180,000 built in 2006, further compounding, an already desperate supply shortage.
Combine this with the continued shortage of mortgage finance for first time buyers and those with small deposits (and no immediate respite due to the new capital requirements set for Banks), there seems to be no relief on the horizon for those not yet on the ladder. The reverse of course is true for those that are.
In terms of the products available you will need a minimum of 25% deposit, with rates decreasing for those with 30% and 35% deposits in some cases. Lenders will also be looking for 125% cover on the mortgage payments, by the anticipated rents, which are decided upon by the Bank’s appointed surveyor with the aid of local evidence and knowledge. The mark up is to ensure there is something in the kitty to cover associated landlord costs; agents, refurbishment, etc. and rental voids.
Although rates are higher and arrangement fees typically range from between 2%-3% of loan amount, for those that can afford and buy well, I suspect there are big gains to be made in the next few years.
One thing is for certain that when the rates do return next year property ownership will again be pushed out of reach for some, as the currently dormant professional landlords will return with gusto.
*The ‘Trading Gap’ is the term coined whereby a person buys a larger property and sell their current property, to realise the gain that has resulted from a market depression. If you assume that all prices have fallen by 10%, by selling at 300k and buying again at 500k, your net gain is 20k.
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