Buy to let mortgages have been very popular over the last two years in the UK. Buy to let mortgages (home loans for properties bought for the purpose of earning rental income) accounted for over 10% of all mortgages in 2006. At that point, the demand for rentals was incredibly strong since house prices were on the rise.
Decline in Rental Demand means less Rental Income
Historically it has been an owners market. The demand for property and rentals has out numbered the amount of properties. In terms of rentals, it meant that landlords could charge maximum rents because of the high demand. For every rental, there was a line of potential renters. The current status of the UK rental property market is not as strong today. Investors are being urged to be more cautious when adding property to their portfolio. According to the Royal Institution of Chartered Surveyors (RICS), rental income has steadily fallen for the fifth straight quarter.
Now there are more landlords than tenants. The current status of the UK rental property market is quite a bit weaker than it was in 2006. In other words, landlords must charge lower rents to stay competitive.
With declining rental profits and an increased number of properties on the market, buy to let mortgage holders might be in serious trouble. When they applied for their mortgage, the rental yield was taken into consideration. Three years ago the rents were much higher, so when financing the investment, landlords figured in the current going rate for rentals at the time. Depending upon the property and the type of loan, some buy to let investors are not able to pay the current monthly payment.
Also, if the buy to let mortgager had a variable interest rate, chances are the rates are higher today than they were when securing the mortgage. Spikes in monthly payments plus reduced rental loans could spell trouble for any investors. If you are one of the landlords in this situation, you might consider selling or refinancing with a fixed rate mortgage so that you will not have to worry about rising monthly payments.
Lower yields in London; a forecast for the rest of UK?
Rental yields for real estate investors in London have been steadily declining for the past several months due to more properties on the market. Rental yields in London have been hovering at around 5% whereas a few years ago it was between 9-10%. According to RICS, there is evidence that the poor market conditions in London were just the beginning. Lower rental yields are spreading throughout the UK. For any would be buy to let investor, it is imperative for you to exercise caution with the current status of the UK rental property market. Do your homework about the area you wish to purchase property in. Just because a few years ago a 10% profit could be seen, that does not mean that you can still bring in that type of profit. Now more than ever, buy to let investors need to do their homework and research the best type of mortgage to fit their budget.
Even with the decreased rental yields, if you are one of the 200,000 people with a buy to let mortgage, you can still make money. If you already own a rental property, chances are you have accumulated appreciation since your original purchase. Many experts see the decline in the rental yield as a correction over huge profits that were not sustainable. As long as a landlord did not overstretch themselves, they could still turn a profit- just not as much as they were able to a few years ago. However, if they entered the property market at the right time, landlords? true profit could be in the property appreciation; in the past few years, housing prices in the UK have jumped dramatically.
The current status of the UK rental property market is in question. Investors should be very cautious where they invest their money. While the correction in profits have already taken place, it is unknown if the rental market will ever yield 10-11% return rates. If property values increase, you can still view buy to let mortgages as part of long-term investment portfolio. However if the housing bubble bursts in the near future, the rental market could see a real slump from which it will take years to recover.