Buy-to-let mortgages on the increase in the UK

As is the case with many sectors of the UK economy, since 2008 the property market has experienced, at best, mixed fortunes. The number of people buying properties outright or with standard mortgages has fallen thanks in no small part to sky-high prices, while those looking to make money from selling homes and office space are left wondering whether they can make profit at all.

At the moment, buying property simply to sell on for a higher price is one of the riskiest things that any business owner could do. The property sector isn’t a seller’s market right now, as resale values for homes and commercial properties aren’t what they were during the housing boom which ground to a halt towards the end of the last decade.

Letting to the rescue?
Banks and building societies who are struggling to sell mortgage products to either businesses or homeowners may have found that while demand for buying property is at a pretty low level, the opposite can be said for renting. As many small firms and house-hunters don’t have the means to even pay a deposit for a mortgage, renting a property is the only option they can afford.

The surge in demand for rental properties has given many property investors large and small a lifeline in the form of a buy-to-let mortgage boom. Banks, unsurprisingly, are among those most likely to benefit from a rise in demand for buy-to-let mortgages, not least because many people looking to become business owners find that being a landlord can be lucrative.

Growing demand
The demand for rental properties, whether commercial or residential, has provided aspiring landlords with a good reason to get into business. On the face of it, buy-to-let mortgages are offering people an opportunity to become a landlord without having to spend too much money on deposits or monthly payments, especially with the Bank of England base interest rate so low.

There are questions over whether the surge in demand for buy-to-let mortgages can be sustained. The main one could depend on whether houses, offices, warehouses and other types of property become more affordable if the UK economy is to grow faster than it is at present. Also, a rise in the base interest rate may render mortgages in general to be more expensive.

Finishing what it started?
Prior to the downturn which started back in 2008, there were fears that the banking and property sectors would combine to cause a crisis, but few experts predicted that such a crisis would last as long as it has. Many blame overheating in the housing market, while the government’s bailout of many banks including RBS and HBOS hadn’t helped.

Ever since the housing boom began in the early 1990’s, prices for property have risen massively to a point where mortgages were only affordable through low interest rates. Many people who didn’t have the means to pay for mortgages helped to leave banks offering cheap credit in a difficult situation, as they couldn’t get all their money back.

Bailout
This led to the bailout of many of the UK’s major banks, which in turn affected confidence from the markets, while it helped to force the current coalition government to implement austerity measures. Basically, the recessionary climate which began five years ago and still hangs over the country like a dark cloud was partly down to an overheated property market and cheap credit.

Fortunately, the boom in buy-to-let mortgages may provide a little short to medium-term joy. Banks, building societies and other lenders are likely to gain from the demand for such products, while landlords who have buy-to-let mortgages approved can, assuming they market their new properties correctly, can expect to get regular income from renting it out to residents or businesses.

Walking a tightrope
Having only narrowly avoided a ‘triple-dip’ recession, the UK economy has been in limbo since the climate as we know it today first became apparent. Although the economy is growing again, it’s at a pretty sluggish rate and isn’t nearly enough to make up for the losses incurred throughout that period, and recent forecasts make for further grim reading.

The UK economy over 2013 is forecast to grow by 0.8% this year, which is higher than the initial 0.7% but still pretty disappointing. The predictions for 2014 aren’t too good either, with growth expected to be in the region of 1.5%. Although any growth is seen as good, especially in light of events in the past few years, it’s still not sufficient enough for many peoples’ liking.

Income provided by buy-to-let properties can help to keep landlords ticking over, and at a time when property prices seem to be stubbornly high, becoming a landlord seems to make good business sense. A spokesperson from Totally Money commented:

“It’s no surprise that buy-to-let is booming. Low interest rates are here to stay for at least a couple more years, meaning mortgage payments will stay low while savers suffer – the average savings yield is an abysmal 1.09%.

“With rental yields soaring upwards of 6% in parts of the country, it seems that buy-to-let is starting to look like a smart investment. If you have the capital then the rewards are very attractive – there are few other investments that come with an expectation of inflation-busting income as well as capital appreciation”, they added.

The future
The housing market is likely to pick up slightly in the near future. According to the Nationwide, house prices rose on average by 0.4% in May, which hints that after some turbulence, the market is about to pick up, while prices are expected to remain high, making it difficult for first-time buyers.

For the housing market to see any sustained growth, a wider rise in living standards is needed. Many people looking to buy rather than rent find that, with low interest rates, it’s hard for them to save money necessary to afford to pay for a deposit, which puts lenders in an awkward position.