The latest Mortgages for Business’ Complex Buy to Let Index has found that choice of buy-to-let mortgages in the UK has increased dramatically in the last three months, spurring landlords to shift their existing equity towards new purchases.
The index found that new purchases made up a significantly larger proportion of lending in the final quarter of 2013, across all residential property types. Standard buy-to-let lending saw the biggest move towards new purchases, with 47% of these plain vanilla mortgages going towards new buy-to-let properties. This compares to 38% representing new purchases in Q3, and 31% at the beginning of 2013.
More complex properties also formed a growing feature of landlords’ shopping lists. Houses in multiple occupation (HMOs) saw a similar trend to standard deals. 29% of mortgages against HMOs were for new purchases in the final quarter, compared to 23% for new purchases in Q3 and 20% in Q4 2012.
Larger, multi-unit freehold blocks (MUFBs) saw the same trend, with mortgages for new purchases making up 31% of loans against such properties, compared to 30% in Q3 and 25% at the start of 2013.
There has been a significant fall in remortgage activity over the last six months despite remortgaging still making up the majority of buy to let activity. In the last quarter, 53% of standard buy to let deals were a remortgage – down from 65% in Q2. For HMOs, 71% of buy-to-let activity was a remortgage compared to 84% six months ago. And for loans secured against MUFBs in Q4, 69% were a refinance rather than a purchase – down from 88% in the second quarter.
Loan-to-value ratios have remained broadly stable. For vanilla buy-to-let properties there was no change in LTVs for the third month running, standing at 68% once again in Q4. HMOs saw LTVs drop slightly to 70%, from 71% in Q3, and loan to value ratios on semi-commercial property fell from 66% in the previous quarter to 53% in Q4.
The only properties to see higher LTVs in Q4 were larger MUFB blocks, with loan to value ratios averaging 68% compared to 62% in the previous quarter. This is likely due to the increase in average property values among MUFBs causing landlords to require larger LTVs.
As price rises accelerated in the final month of 2013, yields have dropped across all property types. Vanilla buy-to-let yields saw a gentle fall to 5.9%, down from 6.3% in Q3, while yields on MUFB properties fell to 6.8% from 7.6% in Q3. HMOs generally record higher yields, although these have also dropped slightly, from 11.8% in Q3 to 10.4% in the final quarter of the year. The most dramatic fall in yields was in semi-commercial property, where the average yield now stands at 4.8% as of Q4, down from 9.8% in the previous quarter. However this is probably due to a smaller data set consisting of higher value, lower yielding properties in London and the South East which have stronger growth potential.
David Whittaker (pictured), managing director of Mortgages for Business, said: “At the end of 2013 landlords could choose between more than 500 mortgage products – the figure today now tops 550. But that choice isn’t just delivering cheaper deals – there are now even more imaginative and flexible financing options out there too – many of which offer some of the best yields.
“With demand for tenancies as strong as ever, landlords are making use of a more buoyant situation to boost their portfolios. As we move into 2014 capital accumulation is accelerating, and joining solid rental income to make buy-to-let consistently attractive to investors.”
