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Buy-to-let Investors Hit By Mortgage Increases

Global stock market turmoil over the past few weeks is now forecast to hit thousands of buy-to-let investors as mortgage lenders are set to increase rates.

Advantage and Edeus, both buy-to-let lenders, announced rate rises on Monday of this week, following on from increases by Northern Rock and Alliance & Leicester. This is happening in spite of the Bank of England’s decision last week to hold its base rate at 5.75%.

Advantage’s rate has been put up from 4.79% to 5.54%, adding £1,500 to repayments over 12 months for anyone with a £200,000 mortgage. A key statistic is that a third of all buy-to-let properties are owned by investors with a portfolio of over 100 properties.

Northern Rock’s buy-to-let rate has increased from 5.69% to 5.79%, and Edeus has put its rates up by an average of 0.65%. On its near prime buy-to-let deal, for those with less than perfect credit history, Alliance & Leicester has pushed its rate up from 6.94% to 7.49%.

There has been a long boom in the buy-to-let property market, but these increases could spell the end. The boom has been fuelled by investors ploughing their money into property after the collapse of pensions in the country. In Britain there are an estimated 400,000 private buy-to-let investors who own around a million properties.

With some lenders raising rates the likelihood is that other lenders will follow suit. Chief executive of Edeus, Michael Bolton, said: “I’ve been in the mortgage market since 1989 and I’ve never seen anything like this.”

This appears to be yet another knock-on effect from the chaos in the Unites States sub-prime market which has affected financial markets and institutions around the world. Victoria Mortgages is a small sub-prime lender which specialises in lending to home owners in the sub-prime category, but it collapsed into administration on Monday. It becomes the first British faller as a result of the global credit crunch, as funding lines dried up for the company.

The London Interbank Offered Rate (Libor) is the key measure of the cost of money on the City’s open market; it went up again on Monday, with the three-month rate, crucial for business borrowing, up to 6.89625%, and now at its highest point above the Bank of England base rate for 20 years. It appears that the market in the UK is still concerned about the Bank’s decision to inject less liquidity into the system as its counterpart in the US and the eurozone. Unlike the rate for sterling the Libor rate for the dollar and the euro has fallen for the past three working days. The increase in the borrowing rate comes at a poor time for UK banks and companies, coming as it does at a time when £70bn of short term loans are due to mature between known and September 18. Banks are fearful that they will have to finance the debts with their own reserves, putting a strain on their balance sheets.

None of the uncertainty is of any use to private investors in the UK.

Tom Smith
171th September 2007

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