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Article> Positive Signs in UK Buy to Let

Buy to let has been getting some excellent press recently and it is easy to see why more and more individuals are turning to buy to let to provide for their financial futures.

Let’s look at the key areas:

Income Streams from Property - Yields are up
While income levels have plateaued in the UK, rents have continued to increase across the country. The average rent paid by private tenants in England and Wales reached a new record high in July, of £725 a month, according to LSL, which owns the Your Move and Reeds Rains property chains. This was an increase in average rents by 1% last month and 2.9% higher than a year ago. This was due to growing numbers unable to get a mortgage, it said. LSL said rents were rising fastest in London and the South East, with the average rent in the capital now at £1,057 a month.

"The backlog of frustrated first-time buyers in the private rented sector showed no sign of clearing in July - in fact, it is still growing," said David Newnes, of LSL. "As lending to those without substantial deposits remains depressed, demand for rented accommodation can only go one way in the long-term - providing further upward momentum for rents.

"The rental market is also entering its summer peak, as recent graduates and those with new jobs begin to look for new accommodation," he added.

Lack of housing – lack of supply
The number of homes started by builders in England has also fallen again, to the lowest level for three years. Government figures released on Thursday showed that only 21,540 new homes were started by builders in the three months to June this year. That was 24% down on the same period a year ago and a 10% drop from the first three months of the year.

The Department for Communities and Local Government (DCLG) said: "Starts are now 54% below their December quarter 2005 peak, but 27% above the trough in the March quarter of 2009." This pressure on supply will continue for years – keeping rental figures high – as the growing population continues to put further pressure on.

Cheap buy-to-let mortgages
For buy to let investors with good credit, there are many mortgages available, and far more choice than at the start of the credit crunch – offering investors mortgages at rates of around 4%. This cheap borrowing, for those with 25% deposits, and good credit, makes the net income available, even stronger. Lender's eagerness to do business with landlords is reflected in a range of attractive new deals and a trend of falling rates and fees.

Virgin Money last week trimmed its two-year fixed rate from 3.99 per cent to 3.79 per cent for landlords with a minimum 40 per cent deposit. There is a £1,995 fee. And Manchester Building Society raised eyebrows by unveiling rates that can be fixed for as long as 25 years. Borrowers need a minimum 25 per cent deposit and must pay a £749 fee. After that they can choose either a capital repayment mortgage at 5.74 per cent, or interest-only at 5.99 per cent. David Hollingworth of mortgage broker London & Country says innovative products such as this illustrate that ‘life is being breathed back into the landlord sector’. Hollingworth says that the proportion of landlord business that the firm does is back at the level of 2007, before the start of the banking crisis.

As an example, one of our clients recently bought in Manchester at £70,000.

He put down 25% deposit ie £17,500, and with fees all in for around £20,000.

Their mortgage was just £52,500 – and at 4.99% was just £218 pcm interest payments. At rent of £550, even after costs he was getting around £220 net income per month, or £2640 per year. So based on £20,000 cash invested, he is getting 13% return on his investment.

Plus we negotiated a £15,000 discount from list price when he bought – so as you can imagine he was very pleased compared with the 1.75% return he was getting in a so called savings account.

So in summary – as was highlighted in our Annual UK Property Review – which can be downloaded here (PDF) – the excellent combination of limited new housing, allied to the rapidly growing population and continued rationing of mortgage funds for first-time buyers, has been a key factor behind the relentless upward trend in rental returns for buy to let investors.

Accountant UHY Hacker Young confirm this. They stated this week, this is due to the poor returns on investments elsewhere. This explains the phenomenal growth in the number of taxpayers declaring an income from property, which has risen from 1.4?million in 2006-07 to 2 million. Roy Maugham, a partner at UHY Hacker Young, says: ‘When the financial crisis began, people wrote off buy-to-let, saying it was the end. It was anything but. Despite the risk of volatility in house prices, rents provide a steady income that other investments can’t currently match.’

So, if you have wanted to take the next step for some time this is the time!

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