RLA : RPI : Remortgaging to boost returns

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other artilces from the October / November 03 issue

Remortgaging to boost returns - October / November 2003

Competition in the market means that many buy to let investors have a pleasant surprise in store when they come to consider remortgaging, says Ray Boulger of independent mortgage broker Charcol.

Some landlords may be starting to ask themselves whether they can have too much of a good thing. The buoyancy of the buy to let sector has been a real consolation to otherwise beleaguered investors in recent years, although the strong bounce in the stock market over the last six months demonstrates yet again how quickly markets can turn.

Although some parts of the country have experienced a decrease in rental income, a significant reduction of rental income is still more of a concern than a reality for the majority of landlords. Avoiding rental voids is probably a greater concern to most landlords.

On the other hand, when it comes to calculating rental yields, the picture looks very different, with substantial falls in yields over the last few years in many areas. However, by far and away the biggest factor causing this drop in yield is the increase in property values, with the impact of falls in rental income being minor by comparison.

Yields on many alternative investments, such as Government Stock and other fixed interest securities, have also fallen over the same period, reflecting the general fall in interest rates. As a result the cost of financing a buy to let mortgage has fallen over recent years, and this reflects not only the drop in interest rates but also increased competition from lenders. This reduction in the cost of finance has to a large extent offset the fall in rental yields, bearing in mind that recent figures from the Council of Mortgage Lenders (CML) show that the average new buy to let mortgage continues to be at 80 per cent of the property value.

By remortgaging, landlords who have finished their initial mortgage deal are finding that they can improve their net income by reducing their monthly mortgage costs and more and more are taking up the opportunity. Certainly, the figures speak for themselves. According to the CML, more than one third of new advances in buy to let lending in the first half of 2002 were remortgages, and our own figures suggest this percentage is increasing rapidly.

The incentives for landlords to remortgage are clear. The best buy to let deals today compare very favourably with those that were around just a few years ago. For example two years ago it was unusual to find a buy to let deal with a special remortgage package such as free legals and a free valuation. Now some deals offer this sort of incentive. Also whereas a few years ago lender's arrangement fees of 1 per cent of the mortgage were common, these are now the exception and arrangement fees on buy to let mortgages are now much more in line with those found in the residential market.

Flexibility is also a feature that isn't confined to the mainstream mortgage market. More and more landlords are finding that flexibility is an important part of their budget and cashflow planning. Features such as over and underpayments and a drawdown facility are available and can help even out any feast or famine in terms of void periods.

Although buy to let borrowers have a greater preponderance towards fixed rates than perhaps other borrowers, many are still comfortable with discount or tracker products, depending on their view of interest rates. In particular, 'wait and see' deals in the form of what are referred to as 'a drop-lock' are certainly increasing in popularity. The drop-lock enables borrowers to enjoy the best of both worlds by taking advantage of current low rates on discounts and trackers but also having the option to switch to a fixed rate without remortgaging if their view on rates changes, or an attractive fixed rate becomes available. The drop-lock works by allowing the borrower to 'drop' their discount or tracker product and 'lock' onto any of the fixed rates offered by their lender at that time. They will not incur the usual remortgage or early redemption fees and will only have to pay whatever lender fee is attached to the new deal.

Landlords are continuing to find buy to let attractive and very few are having any problems in meeting their mortgage payments. The sector continues to offer good prospects over the long term, but borrowers need to continue to take a realistic view of the risks, as well as the rewards. We strongly recommend to all our clients that, just like most other types of investment, they should take a long term view of the market and approach it as a long term commitment. Nearly every form of investment is prone to fluctuations. With property investment, taking a long term view enables investors to benefit fully from any capital appreciation, with their return on the capital invested enhanced by the effect of gearing, without worrying too much about short term fluctuations. The long term outlook appears to be extremely healthy for the buy to let investor. The demand for rented property is expected to grow over the next 20 years from 2.4m to 3.5m, based on Government research. There is evidence that in pockets of the country there is some buy to let saturation where landlords are seeing periods of rental voids but that is not widespread and in many areas the market remains strong university towns are a good example. As the market matures, astute buy to let investors will continue to maximise returns by monitoring their mortgages as well as the properties in their portfolios. Several lenders have recently increased the maximum they are prepared to lend to individual landlords, resulting in more choices for portfolio landlords with total mortgages outstanding of over £1m. Remortgaging to get the best deal possible can prove a very shrewd move.

Needs checklist

When remortgaging most people concentrate on finding the lowest interest rates. But that means they could miss out on some of excellent schemes that offer more flexibility, protection from interest rate rises or funds for future purchases or other benefits, writes Barry Wilderoder of The Money Centre.

There are many things to consider when reviewing your current mortgage arrangements, some of which could be:

Do you want the security of knowing the cost of the mortgage payments for the next few years?
Are you worried about rising interest rates?
Do you need a facility where you can overpay the mortgage and then, if need be, withdraw it later on?
Is the lowest interest rate the most important factor?
Would you like to decrease or extend the mortgage term?
Do you have a plan of how to build your portfolio or are you just leaving it to luck?
Should the mortgage be on a capital and interest (repayment) basis or does it really make sense to have it on interest only?
Is there enough equity in your current properties to purchase more properties and, if there is, do you know how many more you could purchase?
Are you reviewing your mortgage in order to save money?
Do you need a 'forward buying' facility whereby funds are available for future purchases?
Are you aware of what is available or happening within the buy to let market?
Do you have a strategy?

other artilces from the October / November 03 issue

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