by Lindsay Rogerson© Sunday Herald
Originally published: 20.04.2008

Evidence is now beginning to emerge that some buy-to-let investors have been caught out by the double whammy of falling property prices and rising interest rates.

Last month, the residential sales company Countrywide Property Auctions had four properties on Wallace Street in the G5 postcode at auction.

Only two of the flats sold. Of those which sold, one sold at £102,000 – some £27,000 less than a at of the same size and specification in the same street achieved just last August.

David Sanaman, managing director of fellow house auction specialist Essential Information Group, believes that inexperienced landlords are most likely to be caught out in the current climate. He believes those who bought through "property clubs" without carrying out due diligence are most vulnerable.

It is clear that buy-to-let is now going through a signicant adjustment and that landlords sitting on equity gains could face difficulty. Katie Tucker, technical manager for mortgage broker Charcol, explains: "While buy-to-let remortgaging remains at previous strong levels, less than 3-per cent of mortgages taken out in March were people taking the plunge into purchasing. The high cost of mortgages has had an immediate effect, as has the lack of confidence that property value will increase in the next few years. This should change if improving rental yields tip the balance as the rental market soaks up the displaced first-time buyers; however, this could take six months." According to the Council of Mortgage Lenders, 750,000 mortgages have been taken out in the last two years. It has been well documented that those coming to the end of a fixed rate and looking to remortgage are facing a considerable hike in interest rates. According to Charcol, a best-buy two-year xed-rate deal in 2006 was 5.25-per cent. Last week it was 6.5-per cent. That amounts to £73 a month to a £100,000, 20-year repayment mortgage.

For landlords facing a hike in interest rates, here are some of the options for easing the pressure below:

PRIVATE SECTOR LEASING SCHEMES
Landlords looking for certainty could be thrown a lifeline by the growth of private sector leasing (PSL) schemes in Scotland. In return for handing over their property to a council for three, four or five years, landlords get a guaranteed monthly rent – even if their property is empty.

Rents typically match what a landlord would get on the private market, less the fee a management agent would take – typically 10-15-per cent.Where landlords who opt for PSL come out better is that in addition to the guaranteed rent, all legal and final redecoration costs will be paid for by the scheme.

The interest from councils is because of Scotland's 2012 homeless target.

At present, councils operate a priority system when it comes to housing the homeless and do not have to offer homes to those who do not fit the strict "priority needs" criteria. These rules are now being wound down, meaning councils will have to find more properties to house the homeless.

Building new council or social housing takes years, which leaves private rental accommodation as the only viable alternative to bed and breakfast. Andrew Morrison, a director at property group Orchard & Shipman plc, which currently operates PSL schemes for four local authorities and is in talks with a further 18 about setting up schemes, explains the mounting interest.

He said: "If a council puts someone in bed and breakfast only half of the cost will be eligible for housing benefit, so the council will have to pay the other half. Our schemes are eligible for 100-per cent of housing benefit, so make much better financial sense for both a council and its council tax payers." The group currently has 1200 properties under management and contracts to procure another 1300 properties across Edinburgh, West Lothian and Midlothian, and the Scottish Borders.

Depending on the outcome of its negotiation with the other local authorities, as many as 10,000 properties could be needed in the next four years. Put the potential demand in context: Scotland currently meets just 7-per cent of its temporary housing need from private rental stock, according to Morrison, compared to an average of 66-per cent of such need being catered for by the private sector in English local authorities.

RAISE THE RENT
IT appears it is not just first-time buyers who are sitting back and waiting for prices to drop, in the hope that properties may become more affordable in a few months. Landlords are also anticipating an increase in rental demand for family homes as owners of larger properties sell up and rent temporarily while either looking for another property, or to see if they might get more for their money six months down the line (if the doomsayers have called it right and prices do indeed fall). Both these factors are contributing to an increase in rents according to Jim Parker, chairman of National Landlords Association (NLA) Scotland, who says landlords can capitalise on hesitant buyers.

Parker said: "The market is still buoyant and going strong. All the media scare stories have been fantastic for our market as they are creating a lot of demand. Rents across Scotland have typically gone up by between 5-8-per cent in the last 12 months."

REMORTGAGE OPTIONS
Landlords looking to remortgage will not only face higher interest rates, as mentioned above, but will have considerably fewer options than 12 months ago. Denise Harvey, mortgage analyst at Moneyfacts, told the Sunday Herald that there were just 607 buy-to- let products on the market last Thursday. On the same day in 2007, there were 2990 mortgages available: a drop of 80-per cent.

Of the 607 products available today, 145 are to max 85-per cent, 248 are to max 80-per cent and 214 are max 75-per cent and under. This means novice landlords who do not have sufficient equity in their property could find themselves in trouble.

Harvey said: "Those coming to the end of their initial deals will find themselves in a difficult position with payments almost certainly increasing, and possibly not being able to remortgage when their deal ends.

"The BTL market has never seen such a lull and prior to the credit crunch people were entering the market with the intention of making money quickly.

Looking back this should never have happened. BTL should always been seen as a long-term investment." To help its members, the NLA this week launched a mortgage service which will pay cash back to landlords when they remortgage. Basically, the NLA is passing the commission it is paid for placing the mortgage back to its members. So for every mortgage placed through NLA Mortgages, a landlord will receive a minimum 0.25-per cent of the loan advance as a cashback upon completion. This would mean someone with a buy-to-let mortgage of £250,000 would earn £625 cashback.

A LITTLE SOMETHING EXTRA FROM THE TREASURY
One further possible bit of good news, for those facing an unaffordable hike in their buy-to-let mortgage and are forced to sell up, is that changes to capital gains tax rules, which kicked in this month, mean that they now face handing over less of any rise in the value of their property to the government than those selling up just a few weeks ago.

Buy-to-let sellers who were higher rate tax payers, and had owned their property for less than three years, would have had to hand over 40-per cent of any rise in the value of their property if they sold up before April 6. Those selling after this date, however, will pay capital gains tax at just 18-per cent.

CASE STUDY
Edinburgh-based TV production location manager Donald Cameron was so pleased with the private sector leasing scheme through which he rented out a London property he owned that he was the first landlord to sign up for the new Scottish Borders scheme when it launched at the beginning of 2008.

The 43-year-old explained: "Initially I had looked at the Edinburgh PSL scheme but I found my budget would not stretch that far.

"I then heard about the launch of the PSL scheme in the Borders and when I started to investigate the property market there I found the prices for the types of homes I was looking for extremely attractive."

Cameron views his buy-to-let properties as longer-term investments and has tied all four of the properties he bought in Hawick - three two-bedroom and one three-bedroom home - to the scheme, which is timed to coincide with the properties' five-year fixed rate mortgages.

The final lure for Cameron is that his properties are housing people who would otherwise not have a home. He said: "I'm very pleased with the way things have turned out. I have four properties which will make me a modest income in rental, and hopefully gain in capital value over the next five years, and I know I am helping some people who are perhaps in a difficult situation."