Mortgage Availabilty Rising – Prices Still Well Below 2007 Peak

A study last month by has shown that the number of mortgages on the market is greater than 3,000 for the first time in 15 months and 42 per cent more than were on the market last July.

Recent additions that investors are to note are the introduction of a new 75% LTV product by Aldermore to compete with the likes of Birmingham Midshires, Cheltenham & Gloucester & Natwest as well as the emergence of the first 80% LTV we have seen in a while by the Mortgage Works.

Nationwide also announced today that house prices are 9.5% below their 2007 peak with transaction volumes still relatively low despite a slow return of more sellers in recent months. It is likely that the announcement of anticipated capital gains increases may prompt some landlords with more than one property to sell before tax rates go up which will shift the demand-supply balance back in favour of buyers, halting house price rises.

Buying below market value today and locking away equity is still very wise when taking the medium to long term view, particularly if buying wisely for monthly cashflow as well as growth.

Why many landlords that bought in the peak of 2007 are suddenly finding themselves in a strong position

Since the peak and start of the subsequent property market crash in mid 2007, we have all heard horror stories from and about investors who were buying multiple investment properties in the few years preceding 2007. I’m talking about those who caught buy-to-let fever; which seemed to grip the UK after a decade of consistent capital growth and ‘easy’ lending. Those who bought plenty of property that was ‘washing its’ face’ so to speak and only covering costs in the good times; but then fell in value by 20% when the market fell, leaving these investors in negative equity. Many investors who started buying investment property 3-4 years ago thought they would struggle to survive when the crash commenced – with some investors facing 100’s of thousands of pounds of negative equity and cash-flow that was neutral at best.

What we have seen since has turned many of these investor’s situations around completely. Now many of these investors are still in negative equity which is a given, but they are not overly concerned because their cash-flow neutral portfolio is suddenly producing a healthy profit each month. Take the following example:

Investor takes out £100,000 mortgage which tracks at .05% below base rate in July 07. At this point, the base rate was 5.75% so his mortgage had repayments of £5,250 per annum or £437.50 per month. Many investors were happy to buy property at the time with a rental income of £530 per month which, after management, insurance and contingency buffer would just cover monthly mortgage payments. They were happy to buy this way as cash-flow was not as imperative to them as the capital growth they anticipated based on previous years.

So when the market started to drop midway through 2007, many investors who had bought property in the previous couple of years started to panic. Until of course the base rate started to drop… When the interest rate hit 1.5% in January 2009 the investor in the above example was paying just 1% per annum on his money – just £1,000 per year or £83 per month against a rent of £530 per month. When rates continued to slump to just half a percent in March of the same year, many mortgages went down to literally zero! I have seen many a copy of a framed letter from lenders stating ‘The New Monthly Payment on your Mortgage is Zero’ hung on a proud investor’s wall!

Many other investors took out two & three year fixes before the market started to dip in 2007. These were typically fixed around the 5% mark, and once out of their fixed period, reverted to the lenders reversionary rates which were set at the time to track the base rate. A few years back for example, Mortgage Express had a reversionary rate of 1.75% above base rate. Many investors are reaping the benefits of this reversionary rate today. Offer money to investors looking to buy property today at this sort of rate and they will snap your hand off! If the investor in the above example had been on a 2 year fixed tracker in 2007, he would now see his mortgage down at £2,250 per annum or £187.50 per month versus rental income of £530. With cash-flow currently this strong and still on a tracker rate that far more attractive than any currently on the market, being in negative equity suddenly doesn’t seem so daunting.

A common saying I hear from investors and industry contacts alike is that, ‘You make your money in this game when you buy – not when you sell.’ IE you must be buying at well below market value in the first place to prosper from a market value sale at some point in the future. This has elements of truth – of course it helps to buy below market value, but it is not the be all and end all of successful investment in property. If you bought at 15% below market value in the peak of 2007 it wouldn’t help matters much if the market dropped 20% overnight!

A combination of buying below market value, with strong monthly cash-flow, and the ability to take a medium to long term view with property is key for success. It’s imperative to take a medium to long term view, as history shows, you will always prosper over the long run if investing sensibly. The market throws up surprises as we have seen a few times now – no one predicted interest rates would rise to 15% in the late eighties, nor did they see them falling to their current level of half a percent. Whichever market you are in however, hold tight for the medium to long term and you will generally do very well.

Now is as good a time to buy as ever – you will probably never be able to pick up deals at genuine discounts of 20%+ below today’s low market value for many years to come. If your cash-flow is strong and resilient to interest rate fluctuations and you can sit on these types of deals for the next sustained period of capital growth, you really can use today’s market to build good levels of income and genuine equity.

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