1! BUY TO LET PROFIT GUIDE 2010 About the author John Simpson is a writer, industry commentator and a seasoned mortgage broker. He is a director of the award winning buy to let brokerage, Resident Broker and has been involved in property and the related finance for over fifteen years. If you’d like to offer this report with a Creative Commons license as a download on your own blog or web site, please do. However, we do ask that you host the files on your own site rather than linking back to the original residentbroker.com download. The only restriction is that the author’s credit remain intact. ! BUY TO LET PROFIT GUIDE 2 0 1 0! 2 Table of Contents Introduction ............................................................................3 The Mortgage Market – what has happened? ...................4 The Current buy to let market .............................................5 And Beyond... .........................................................................7 3! BUY TO LET PROFIT GUIDE 2010 Introduction 2010 could well be a defining year for the active property investor. The massive changes that have happened over the last 2 years have thrown up many opportunities (and threats) for those still seeking to make a profit from this volatile sector The lack of finance, the fall in property prices and historically low interest rates have all converged to create an environment of uncertainty, which no doubt the successful investor can directly benefit from. So, what is the purpose of this report? Well; I want to accomplish three objectives: 1. For those of you not bored to death by the constant post- mortem programs on the credit crunch, I just want to briefly summarise what has happened. Don’t worry this will only take 30 seconds to read 2. To let you know what is happening in the buy to let market right now; what lenders are thinking and how the next few months is likely to pan out. 3. To fully prepare you for the new lending climate: I want to outline a number of practical steps you can take to make sure 2010 is a success for your property investment business. ! BUY TO LET PROFIT GUIDE 2 0 1 0! 4 The Mortgage Market – the 30 second guide to what happened Even the journalists are getting bored of using the phrase ‘credit crunch’, however its after-effects are still being felt to this day Buy to lenders that relied solely on wholesale markets for funding simply couldn’t continue to lend under the old model, and many of the major and specialist buy to let lenders have simply disappeared. As for the rest? Well, many banks have consolidated, and you only need to look at how big the Lloyds Group are now, and they effectively hold 30% of the mortgage market share, to see how few lenders dominate. (Note this figure is far higher for the Buy to Let market) With less capital to lend, the banks have significantly changed their strategy. No longer was there a race to increase volumes (and as a consequence, having to reduce margins), instead the remaining lenders were concentrating on lower volume but higher margin, “safer” lending. What does that mean? Effectively; • Lower loan to values - now at 75% and below. • Restriction on number of properties owned within a lender • The need to prove income You get the picture. The balance of power has shifted, and the shrewd investor will adapt in order to evolve into the new world order. 5! BUY TO LET PROFIT GUIDE 2010 The buy to let market right now I suppose the first thing to point out about the buy to let mortgage market is that it really isn’t as bad as this time last year. At the time of the Lehman brothers collapse, there really was a number of weeks when it felt like the mortgage market had gone completely, such was the uncertainty of the market. During those fateful weeks, it was near impossible to get any lending, whatever the circumstances. So what are we left with? Reduction of Lenders The number of lenders left in the market and their appetite & ability to lend has reduced. As many of the specialist lenders have ceased lending, the buy to let market is now dominated by a few big names. This has been exacerbated by the merging of the existing lenders – most notably the fusion of the former Lloyds TSB & HBoS. Lenders want quality not quantity Times have changed, I’m afraid, and rather than competing for your business lenders are now picking and choosing their preferred clients. The cost is high – well, it’s all relative! I say relative because we were all getting used to buy to let mortgages being just slightly higher than residential mortgages. With base rate at 0.5% and residential mortgages also decreasing it certainly seems buy to let mortgages have been getting more expensive. So why is this? The obvious reason is: ! BUY TO LET PROFIT GUIDE 2 0 1 0! 6 Less competition We’ve seen the number of lenders that have left the market above. The remaining lenders have almost too much business, and certainly don’t need to lower their prices to maintain their old lending volumes. No innovation in buy to let products until the housing market stabilises What does this mean? Well, during the boom years the lenders were almost always looking to increase their lending volume. As most couldn’t always simply compete on price many, had to look at different niche markets within the buy to let sector - therefore innovation took hold. There were buy to let products for student houses, HMOs, no rental needed, offset mortgages, portfolio mortgages etc. However, many of these products have now gone. Why? Well it certainly isn’t all about risk. Take Paragon – they specialised in houses of multiple occupation (HMO) and have one of the lowest arrears rate in the market, but even they can’t get the finance to re-enter the market. No; the facts are even simpler. Current lenders don’t need to be innovative to get he lending volumes they want s,o why should they? It’s a lot easier to administer a straight forward mortgage than trying to lend on a refurbishment property. 7! BUY TO LET PROFIT GUIDE 2010 And Beyond... be prepared! OK. So you may be feeling quite glum now considering the above comments- but my advice is, it’s not all bad! As of Spring 2010, we can already see that the number of mortgage approvals are increasing from their low, and there are tentative signs of gradual improvement in transaction levels and in lender’s ability to, well, lend. In fact, in the great words of of a wise man: ‘where there’s change, there’s opportunity’. If you can secure the finance now, just think how much better the property deals are going to be compared to 2007. We’ve already had a massive drop in house prices, and whilst prices are still stabilising and there is still uncertainty in the market, for the canny investor who looking for strong cash flow and longer term capital growth, then this could be a golden age. That still rests on the assumption finance is available. Well, the good news is, it is! And in this section I going to give you some valuable tips to make sure you can still acquire this carefully guarded money. 1. Make your money from anything else but property. OK, not so easy if you’re a full time property developer, but the fact of the matter is many lenders are wary about lending to people whose sole income is derived from property. If you have independent confirmed income, it’s just easier. 2. Make sure your credit file is spotless. This kind of goes without saying, however now its even more important. A blemish on your credit file (even if it isn’t even your fault) could mean you have trouble getting a mortgage, and in this environment many lenders will not ! BUY TO LET PROFIT GUIDE 2 0 1 0! 8 entertain the idea of overturning or appealing a failed decision. Get this fixed first! 3. Have your proof of deposit readily available. If it is difficult for you to prove, for!example it’s in lots of different current accounts etc, then it can slow down the application process dramatically, and in some instances it can simply lose you the deal. Lenders ideally like a steady build up of funds in your account over time, or if there are any lump sums they want an viable explanation, e.g. sale of another property. 4. Don’t always buy in joint names. For example, if you and your respective partners are buying property, then buy in single names as that can mean you can buy twice as many with the same lender. E.g. Birmingham Midshires’ maximum is 9 properties. That would mean either 9 joint applications or 9 single applications each. Go figure. Finally, and most importantly: 5. Get advice from an expert. It is imperative that your broker has the necessary experience in property investment finance. In fact, they would ideally be property investors themselves.! ! Why is this? ! Well, even within mortgages people have different specialities. A mortgage broker who works on the high street within estate agents, may be fantastic at explaining to first time buyers how a mortgage works, but is unlikely to know what today’s modern investor like you really requires, and crucially how to approach these lenders. ! 9! BUY TO LET PROFIT GUIDE 2010 It’s not all about rate. ! The canny public has a reputation as rate-chasers, and still mortgage rates seem to capture the headlines. However, we all know that’s just one factor.! ! For example, sometimes you will need to move quickly, sometimes not – there is no point going for the lowest rate with a lender who takes two weeks to even book a valuation, if you have bought at auction. The speed of a lender in this case becomes more important than simply the rate. That mistake can cost you your 10% deposit, and I have seen it happen. Keeping you informed. ! Mortgages and criteria move quickly, especially in today’s turbulent market. You need a switched-on broker who is truly dynamic to secure mortgage products on your behalf and tell you when mortgage products are being replaced. ! In building Resident Broker, I have engrained these values within our teams.! ! We specialise in property investor finance because this is our passion, and that’s what we are experienced in. Many of our brokers are property investors themselves and realise how important having a reliable broker as part of your team really is.! ! So, what’s next? Hopefully this report has been helpful in some small way but it can never be a replacement for specific, tailored, impartial advice. So give us a call on 01424 205 373 where we are waiting for your questions or email me directly at firstname.lastname@example.org 24 hours ! BUY TO LET PROFIT GUIDE 2 0 1 0! 10 a day because here at Resident Broker, the buy to let market never sleeps! Thanks for reading and good luck out there. John March 2010 Resident Broker Ltd. 01424 205 373 !