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Gearing among buy-to-let landlords is ‘low and getting lower’

Gearing among landlords remained low in the first quarter of the year, with the average loan-to-value (LTV) ratio falling by 2% to 35%, according to Paragon Mortgages’ latest PRS Trends Report.

On average, landlords spend 30% of their rental income on mortgage payments, with almost half - 43% - in Q1 2017 saying they spend less than a quarter.

“Average gearing is low and getting lower, and this long-term de-leveraging demonstrates just how financially conservative buy-to-let landlords are,” said John Heron, managing director of Paragon Mortgages. “Looking ahead, it’s realistic to expect this downward drift in gearing to continue as the PRA’s new buy-to-let underwriting standards take effect.”

Despite some fears that thousands of landlords would off offload investment properties ahead of this month’s buy-to-let tax changes, the study, based on interviews with 203 experienced residential landlords, suggests that the average investment portfolio in Q1 was 13 properties, in line with the long-term average. But buying intentions remain subdued, with most landlords not expecting property portfolios to change in size over the next 12 months.

The average value of investment property portfolios remains level at around £1.7m, with a quarter of landlords expecting the value to increase in the next 12 months, whilst just 8% think it will decrease.

According to Paragon's panel, demand for private rental properties has eased in the previous three months, with 38% of landlords saying tenant demand is ‘growing’ or ‘booming’. However, sentiment remains historically high and almost half - 46% - of landlords believe tenant demand will increase over the next 12 months.

Heron added: “Our PRS Trends Report indicates a resilient sector in Q1 2017 but, as the mortgage interest rate tax changes filter through between now and 2021, landlord confidence may be eroded further which could well result in a reduction in the supply of property to the sector and, in turn, higher rents.”

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