Is this the right time to get back into buy-to-let?
Falling property prices are encouraging investors to consider coming back into the market but buyers should look hard before they leap, writes FIONA REDDAN
WITH TWO-BED apartments now for sale in Dublin’s city centre for as little as €140,000, for those not languishing in negative equity or crippled by salary cuts, the possibility of property investing is once again coming to the fore.
Indeed a recent survey indicated that a third of people would now consider investing in property, although statistics show that while many people may be considering dipping their toes into the investment waters, few are actually doing so. In the second quarter of 2010 for example, investment property mortgages represented just 3.5 per cent of total mortgage lending according to IBF/PwC statistics, down from about 20 per cent in 2008, with just 284 investment mortgages drawn down.
While caution is obviously playing a part in the lack of investment decisions, the difficulties in obtaining finance in the current environment is also a factor. According to Karl Deeter, operations director with Irish Mortgage Brokers, it is now “incredibly difficult to get an investment mortgage”.
So what do you need to know before you make that leap?
1 DON’T COUNT ON CHEAP CREDIT
While interest rates in Europe are stuck for the time being at 1 per cent, new buy-to-let investors should not expect to get credit at anywhere near this rate, with banks having shifted rates upward repeatedly since the property bubble first burst. Back in the boom years, investors could expect to get tracker mortgages of about ECB +1.35 per cent, but the differential between residential lending rates and investment rates, has since widened considerably.
According to Frank Conway, a director with Irish Mortgage Corporation, in the past investors could expect a difference of about 30 basis points between residential and investment mortgages, but this is now as high as 150-200, with investment rates now well over 4 per cent. As Bank of Ireland’ recent 0.45 per cent increase in its investment rates demonstrated, these rates might continue to rise.
2 NOT EVERY BANK IS IN THE MARKET FOR MORTGAGES
If you have previously invested in property, you may recall the eagerness with which banks knocked on your door, delighted to lend you money. Much has changed since the boom years however and many lending institutions, such as Permanent TSB, are now simply excusing themselves from lending to property investors. Even those who are lending are extremely selective.
“Even when they have criteria, in practice they are finding ways not to lend,” says Deeter, highlighting the case of a recent client whose mortgage application was refused on the grounds that he had saved his deposit in a current account rather than a specific savings account.
3 DON’T BE IN A HURRY
The days of calling your bank manager to get a fast-track loan approval are long gone, and according to Deeter, approvals are now taking two weeks on average.
“It’s become harder over time to get the same thing done,” he says.
4 YOU’LL NEED A SIZEABLE DEPOSIT
With the days of 100 per cent mortgages long gone, investors are now required to come up with significant down-payments towards the cost of properties. In general, you should expect to have a deposit of at least 25 per cent of the overall price. So, for a €200,000 property, you will need a lump-sum of €37,500. However, according to Deeter, it is only the “very strong applicants” who are getting LTVs of 75 per cent.
“Someone who could afford the property even if it wasn’t rented – that’s the kind of person who is getting a mortgage at the moment,” he says. Otherwise, you will be looking at getting funding of only 50 per cent.
Banks have also gotten stricter with regards to valuations. Irish Nationwide for example, requires a new valuation report if the existing report is older than six months.
5 STRESS TESTS ARE ESSENTIAL
With interest rates “only going one way”, Deeter recommends that investors stress test their repayments at rates of up to 7 per cent. So for a €250,000 mortgage, you should have about €1,700 a month to hand.
6 PROPERTY MAY BE CHEAPER – BUT FINANCING IT ISN’T
While property prices may have fallen by as much as 50 per cent, the increase in the costs of financing means that a property purchase may not offer as much value as it first appears.
“Banks are essentially capturing any value in the market,” notes Deeter. For example, if you were to purchase a €400,000 property three years ago on a 2 per cent tracker rate over 30 years, you would have been looking at repayments of about €1,478 a month.
Now you may be able to buy that same property for €300,000 but on a 4.2 per cent rate, your repayments will be €1,467, so the property has actually only become €11 cheaper a month “You need to look at property from a cash flow, rather than capital appreciation, perspective,” advises Deeter.
7 RELEASING EQUITY MAY NO LONGER BE AN OPTION
With thousands of properties purchased all over the world, from the waterways of Leitrim to Dubai’s “World” project, on the back of equity which had been built up in residential properties in Ireland, refinancing your mortgage to facilitate the purchase of another property was once very much the done thing.
Not any more, however. With thousands of homeowners stuck in negative equity, many will find they have no value built up in their home which they can release to fund a new purchase. For those who can, the changed banking environment may mean that refinancing isn’t an option. “Banks mightn’t be too interested because you’re just borrowing the deposit,” notes Deeter.
In years gone by, a common technique to bring down the cost of financing used by property investors who no longer had outstanding mortgages on their own home, was to take out a new mortgage, at a cheaper residential rate, and use this cash to purchase an investment property. However, “no-one will do that now,” notes Deeter.
8 INTEREST ONLY IS FOR A LIMITED PERIOD
With only the most credit worthy of investors getting mortgages, interest only is “almost a no go area at the moment” notes Conway. “You have to be able to show you can pay off capital and interest,” he says.
If you do manage to secure an interest-only loan, remember that it is only designed to last for a specified time-scale, as investors with Permanent TSB are now discovering.
The bank is looking to move investors off interest only to full repayment loans, which is placing many investors under severe financial pressure as they are not making enough rent to cover the new repayments.
“Someone who could afford the property even if it wasn’t rented – that’s the kind of person who is getting a mortgage at the moment. Otherwise, you will be looking at getting funding of only 50 per cent