With the biggest inflation rise seen for 20 years and the rate soaring to its highest level in three years, hitting 5.2% last month, we wanted to see how this hike in inflation will affect Buy-to-let (BTL) property investors.
The effect of inflation on a BTL investor depends on how much actual money they have to invest with and whether they can afford the squeeze on their finances that an inflation rise implies.
Gordon Rae, Business Development Manager at Cheval Bridging Finance, believes “As the inflation rate continues to creep up and pressure continues to keep interest rates historically low, with no significant sign of change, deposit savings will continue to devalue.
“Investors will become ever more attracted to the buy to let market to provide a positive investment return.”
When inflation goes up it means that not only does the everyday cost of living increase, but all the goods and services an investor buys when developing a property to sell on or rent it out, also become more expensive. This can include plumbers, surveyors, electricians and solicitors as well as paint, flooring and furniture.
A view supported by Yasin Patel, Director at Mayfair Bridging Ltd, who said: “I think as inflation rises buy-to-let investors will have to take into account the rise in cost of renovating a property for instance costs of plumbers, electricians and the general cost of goods, such as carpets and decoration. Builders buying buy to let are at an advantage on this as they do most of the work themselves.”
When figuring out a property’s investment potential and how inflation fluctuations will affect property investors, they must factor in rising rental incomes if they’re investing for BTL and purchasing the property at the best possible price.
Duncan Kreeger, Chairman of West One Loans said, “Inflation is great for buy-to-let investors with large mortgages. And with inflation at truly appalling levels – inflation on the retail price index measure has now hit 5.6%, the highest rate for 20 years – it’s better than it has been for a long time.
“The flip side is that inflation is effectively redistributing wealth from investors with no mortgages – whose real terms house prices are falling – to investors with mortgages. Low interest rates mean the real value of debt is falling while the value of many saving pots is being eroded by 4-5 per cent a year. With inflation so high it’s a very significant problem. Average UK house prices are down by 29.9 per cent in real terms from their July 2007 peak.”
The latest statistics from the Office for National Statistics show that the consumer price index (CPI) measure of inflation rate was 4.5 per cent in August. This month’s rise in inflation to 5.2 per cent was as a result of a number of factors, such as rising utility bills as well as the prices of fuel, air travel and food prices soaring. The retail prices index (RPI) rate of inflation rose to 5.6 per cent, the highest since June 1991.
Over time property investing offers some protection against inflation. As many BTL property investors have borrowed money to invest in a real asset, they are letting the bank’s money erode in value while they, in exchange, have a real asset in their investment property that should retain or grow in value over a period of time.
According to the Council of Mortgage Lenders, tight lending criteria froze 100,000 first-time buyers out of the market last year alone. Property investors have been feeling the squeeze and have been finding it hard to go to a bank and borrow more.
With cash-deposits generating such uninspiring returns, private investors and BTL landlords are heading to the auction houses to pick up income-producing property assets. A lot of stock sold at auction is seen of as secondary quality, and therefore banks are hesitant to lend, which is where bridging lenders can step up to the plate with bridging loans for auction properties.
Yasin Patel added: “Investors will be looking to cut costs in other areas such as the purchase price of the property. The good thing at the moment is that the base rate is remaining low, once the base rate rises and the cost of funds go up, as well as inflation it will become tougher for investors and they will have to be more savvy. As we all know, the rents are rising and I think this is not just due to the fact that people cannot afford to buy at the moment but also due to the inflation and investors wanting to still make the same profit mark up.”
Using a bridging loan will see a potential BTL landlord able to refurbish a property’s bathroom or kitchen, and they can then attain a high street mortgage at a reasonable rate and start renting out their property.
“I was discussing this point yesterday with one of our investor / borrowers,” Jonathan Rubins, Managing Director of Alternative Bridging Corporation Ltd, told us. He added: “An interesting view is more based around rental, where prime rents have seen a 15 per cent annual growth considerably outstripping inflation. The issue is double digit rental increases for at least 2 years on the trot cannot be sustained for 2 years on the trot but that the acute shortage of new stock means anything decent is snapped up in minutes. They seemed far more sanguine about utilities when they are seeing such high demand for the flats. That of course is coupled with low interest rates which makes the whole model work so much better.”
Research by specialist buy-to-let lender Paragon Mortgages has revealed that intermediaries recorded an increase in buy-to-let mortgage applications in the third quarter this year.
On average, intermediaries recorded a 3.1 per cent increase in BTL business during the quarter, which is positive news for the private rented sector. Overall, 43 per cent of intermediaries recorded increasing buy-to-let business levels, compared to 7% who said business levels fell.
The research also showed that BTL mortgages accounted for 24.3 per cent of the total mortgages processed by intermediaries in Q3, which has increased from 20 per cent three months ago and is the highest proportion since Paragon started asking the question in the first quarter of 2007.
Elsewhere, intermediaries reported an improvement in the availability of buy-to-let finance, with 58 per cent of respondents saying they believed BTL mortgages were more readily available, and 31 per cent saying that it had stayed the same.
In these ‘squeezed’ times using short term financing to purchase properties, especially those at auction with below market value properties, is an ideal and viable solution to help those wishing to start building up a portfolio of properties or those existing investors and landlords who want to boost their portfolios also.
Analysis published last week by independent financial research company Defaqto has shown that BTL mortgages rates have fallen in the last year, but remain significantly higher than residential mortgages.
The findings show that average interest rates have fallen significantly in the last year across all types of BTL mortgage and average arrangement fees have also generally fallen. However, it also indicates that interest rates and arrangement fees for BTL mortgages remain markedly higher than for normal residential mortgages.
The Defaqto data shows that average rates for 2, 3 and 5 year fixed rate and 2 year base rate tracker BTL mortgages at 75% LTV have dropped markedly since September 2010, and that average arrangement fees have also fallen for several types of BTL mortgages.
David Black, Defaqto’s Insight Analyst for Banking, stated: “For those looking to get into the buy to let market, the last year has seen some positive developments. While interest rates and arrangement fees have reduced we have also seen a number of new lenders enter the market as well as existing lenders expanding their product ranges.
“People should factor mortgage fees into their calculations as, like the interest rate, they tend to be much higher for buy to let mortgages than for residential mortgages, and can make a real difference to the overall cost of the mortgage. Many borrowers will want to use the expertise of an adviser to help choose the best buy-to-let mortgage for their circumstances.
Rents are going up and the amount of tenants is increasing also, thus emphasising the moving trend of renters as opposed to buying properties. The lack of mortgages to first time buyers and the amount of deposit required to purchase a property now that large LTVs are not effectively available.
As a result, rental income is on the up and the amount of people that are looking for suitable properties to rent. The increasing number of bridging lenders that are looking into the BTL mortgage market means that for investors they can utilise their products and loans to take advantage of the increase in inflation.