Tuesday, 15 May 2007

It is a great time to rent in Scotland

I bet there are stories like this all over the UK. Here we have an account from the Scotsman newspaper of declining buy-to-let yields in Scotland, In the last few months, rental yields have fallen by almost 1 percent. In fact, yields in Scotland are now so low that an investor could do just as well if they put their money in a one year deposit in a bank.

Think of the advantages of a savings account over a buy-to-let property:

1. Your deposit is guaranteed. There is no serious prospect of losing your capital due to deposit insurance. In contrast, housing values will soon be trekking South once the bubble bursts.

2. No difficult tenants, who might trash your property or skip off without paying the rent. No collection difficulties; in my experience banks tend to pay interest promptly.

3. No need to do repairs or maintenance on a bank deposit.

Many thanks to Ben, who writes the One-Way Pendulum blog for the link suggestion. It is a great blog, and well worth reading regularly

RENTAL yields for buy-to-let landlords in Scotland plunged in the first three months of 2007. They are also falling faster than in any other part of the UK.

A leading buy-to-let broker told Scotland on Sunday that he thinks Scottish rental yields will continue to be squeezed for the rest of the year, and that coupled with what he sees as irresponsible lending, could leave novice investors' financial plans in jeopardy.

Scotland-wide, rental yields fell from 6.88% in the fourth quarter of 2006 to 5.99% in the first three months of this year - a drop of 0.89%, compared with a fall of just 0.12% in England.

The dramatic decline north of the Border is due to the sharp rise in house prices. As landlords have to pay more for properties, the profit they can make from renting them out, after mortgage repayments, has shrunk. With the three interest rate rises of recent months, and at least one more predicted, experts expect the situation to get harder for landlords in the short term.

All this paints a rather gloomy picture for a market which has seen rapid expansion so far this century. In 1999, £3bn was outstanding on UK buy-to-let mortgages. But buy-to-let loans will top £68bn by 2010, according to a report from market research group Mintel. Indeed, buy-to-let mortgages now account for 11% of all mortgage loans, according to the Council of Mortgage Lenders (CML).

The huge growth in buy-to-let has been partly fuelled by the entry of novice landlords. Some 58% of landlords have only one or two properties, with the vast majority of these reportedly viewing their properties as a way of boosting retirement income or to help ease the financial burden of funding children through university. It is this group who are believed to be most vulnerable to any further falls in yields.

The CML says that the number of buy-to-let loans running three or more months in arrears is 0.69%, lower than the 0.98% for regular mortgages. However, CML admits that rapid recent growth in the buy-to-let market could mean that arrears on these loans might not yet have materialised in official figures. It takes time for stretched repayments to turn into arrears.

B&B also acknowledges a sharp rise in self-certificated buy-to-let loans - where no evidence is required of other income. These leapt to 46% last year, although the bank says the increase partly reflected growing numbers engaged in flexible working and self-employment.

"Traditionally, lenders would only advance loans where the monthly rental income was 125% of the monthly repayments, but for certain landlords, such as those with larger portfolios, this might not provide the best option."

However, Lee Grandin, managing director of specialist mortgage broker Landlord Mortgages, believes the loosening of borrowing rules is irresponsible and all about a grab for market share. He said: "If you go back five years there were maybe 100 products on offer. Now there are 800 products.

"There has been phenomenal product growth and that inevitably means prices have been cut to the bone. Now, because lenders cannot compete on price, they are reducing criteria."

A huge wave of buy-to-let borrowers are coming off very low three-year fixed-rate mortgages and are now facing significantly higher borrowing costs. Bank of England base rates are 1.25% higher than they were in 2003, which is reflected in buy-to-let mortgage rates.

David Alexander, of Edinburgh letting agency DJ Alexander, advises clients that traditional properties in areas such as Edinburgh's New Town and Glasgow's West End tend to rent faster and for more than similar-sized properties in new developments. Grandin also advises landlords to steer clear of buying new build in a market where yields are in decline.

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