What are the BTLs going to do?

mrstinchcombe

The general consensus amongst the so called "experts" when it comes to house prices, is that the level of growth will slow down further and continue to rise in line with inflation.

When this happens what do BTLs do?

I assume BTLs are in it for the investment of the price of the house, more so than the rent they recieve. So when this advantage goes what do they do?

Do they sell and invest elsewhere or stick?

Generali

mrstinchcombe wrote:

Do they sell and invest elsewhere or stick?

I guess in most cases it'll come down to 2 factors:

1. Can they afford the investment? For recent BTL purchases with low deposits, particularly of new builds which tend to depreciate rather than appreciate in value for the first few years, rents won't cover costs of mortgages, voids and repairs. In some cases these will be sold as the bad investments they are, in others sales will be forced by mortgage holders as owners won't be able to afford to keep paying out for a loss-maknig investment.

2. Do they want the investment? Earlier BTLers, those renting out inherited property or those with big deposits aren't shelling out cash each month to hold their investment. My guess is a lot of these will stick with the property almost regardless of what happens to prices, up down or sideways. The main reason I believe that is because it costs such a huge amount of money to sell a house.

Alan_M_2

mrstinchcombe wrote:

I assume BTLs are in it for the investment of the price of the house, more so than the rent they recieve.

I think you'll find this assumption is incorrect and you've made the same mistake as a lot of amateur "Investors".

A serious investor will put there money into property as an investment vehicle whilst the going is good - in so much as the rent generates a yield of between 10%- 15%. The capital increase in value is a bonus.

Many professional investors have not been entering the market for a while because this environment no longer exists, however plenty of amateurs have seen how much money the real investors have made in capital increases and jumped on the bandwagon - the problem with this scenario is they are gambling everything on a future increase in value as the rental yield is now often under what you could earn in a bank risk free (less than 5%).

This is not investment, it's speculation.

What do the professional investors do? Well they carry on as they are as they bought before the rises and are still getting a good return on their initial investment, or they sell out now having realised a return on investment plus capital increase and invest in another asset or range of assets that are currently performing better, the stock market for instance.

The economic cycle marches on it's inevitable way.

Rick62

A number of more recent BTLs will be having problems and will have little choice but to sell. Because interest rates of rising in the last couple of years from below 4% to over 5% when BTLs come to remortgage they are increasingly finding it difficult to cover the new increased rates with the rent. Eg, previous, £1000 rent, £800 mortgage at 4%. 2 yr Fixed ends, SVR 7% (being £1400) new Fixed rate 5.5%, £1100. But the lender won't even give them the 5.5% rate because the rent is only £1000.

So a lot of landlords will be rying to push through £200 increases and a lot will be selling because their mortgage payments have jumped several hundred pounds.

bloomsberg78

In my area, there's too many BTL properties that their competing against each other therefore driving rents lower. I was a BTL LL myself up until last June and know for a fact that the Rental income haven't increased over the last 4 years and if anything are a bit lower.

Generali

Rick62 wrote:

But the lender won't even give them the 5.5% rate because the rent is only £1000.

Is this true? I've been trying to work out the impact of rising rates, from the historically low level, on the current housing market with the relatively new factor of BTL and been assuming that remortgaging can be done a reletively reasonable rates (i.e. below 6%).

If LLs are seeing their interest bill double, presumably they'll become distressed sellers (people forced to sell because they can't afford to hold the asset) pretty quickly.

Pop!

Rick62

Yes, I think we will see some landlords who are highly geared in very tight situations, with rents hardly covering the interest before and the interest payments increasing by 40% to 80% if they fixed about 2 years ago.

Most landlords take Fixed rates, usually for 2 to 3 years, so if someone tooked a 2 year fixed rate 21 months ago they will have been insulated from the base rate increases, but what will they do in 3 months when their fixed rate ends?

epz_2

Generali wrote:

Is this true? I've been trying to work out the impact of rising rates, from the historically low level, on the current housing market with the relatively new factor of BTL and been assuming that remortgaging can be done a reletively reasonable rates (i.e. below 6%).

If LLs are seeing their interest bill double, presumably they'll become distressed sellers (people forced to sell because they can't afford to hold the asset) pretty quickly.

Pop!

not that i wouldnt like to see many btl'ers get spanked as well but one point to remember is the demographic that tends to do this also tend to be employed and hopefully sensable enough to base purchases on repayment morgages cost + a bit of profit = rent.

now average joe speculialtor (not investor) will be pretty reluctant to sell at a loss if they have a tenant and need to chip in a little of their cash to support them as they will see it as paying for an asset. it is likely only the really highly geared investors and people who get stuck for long periods of time with no rent that need to sell up at a loss if the purchase was in the last 2 years or lower market price and decreased profit if bought longer ago.

unfortunalty im comming to the opinion we will need a spike in unemployment to trigger a true correction

Generali

epz wrote:

unfortunalty im comming to the opinion we will need a spike in unemployment to trigger a true correction.

That was my thought too but I'm not sure I agree now. The housing !!!!!! supplements in the weekend papers all recommend i/o mortgages for BTL as the tax can be offset against the interest so I would think that a lot of mortgages haven't been paid off at all since they were taken out (anyone know if this last bit is/isn't true?).

According to HM Treasury, the average LTV is 80% and rental cover is 130%. Thus if interest rates rise for the BTLer from 5% to 7%, the rental cover drops to 93% (I think-the sums seem to work).

Without voids or any depreciation taken into account, the property becomes a gentle drag on the family finances of 8% of the amount of the rent - according to Rent Right (who they?) the average rental in this country is £866pm implying a £69 shortfall each and every month!

With a month's void and a few hundred in depreciation (new washing machine or painting a couple of rooms for example) you're paying out £2,000 pa for the pleasure of renting your house to someone! That's great if you've got a load of spare cash coming in but if you can't afford to burn £40 a week it's got to be tempting or even necessary to sell.

Feel free to point out any flaws in my sums and I'll eat all the humble pie on offer but it all seems to work as far as I can tell.

Generali

A question - with a fixed rate BTL mortgage, when the term ends does the lender have to revert to some sort of variable rate or, in some cases at least, can they call the loan in entirely or ask for more margin?

epz_2

nice figures, all i can come up with is the general feeling that 1-2 hous btl owners are more likely to have taken the repayment since all the talk i hear from that type of group is getting someone to payoff their morgage, they dont strike me as likely to take the most tax efficient route as its more an emotional impression of owning property which "never goes down in value".

from what i understand interest only is only really adviable if you are very young and are hopeing inflation will eat a big chunk of it away, you have no way of affording anything else and its cheaper than renting in the private sector or in the highly geared btl market with lots of property.

all these groups will get hurt by interest rate rises but i dont have any house buying demographic data to guage what type of effect this will have on the overall market, my guess will it will be very regional, even down to street level if you get a couple of blt landlords owning a large ammount of property in one location eg a block of flats or new build estate that will create real problems with dss renters getting moved in or property prices plummeting