More fuel for the buy-to-let bonfire

By Nick Booker, Staff Columnist
Published 8th Jan 2007, (a Monday) at 12:00AM
www.in2perspective.com

2007 will see a new price-war emerge in the buy-to-let mortgage market as GMAC launch the most speculative product ever. GMACs new buy-to-let mortgage allows investors to borrow at less than the Bank of England base rate so long as rent matches the interest payments.

Buy-to-let lenders protect themselves against bad debts in three respects. The interest rate they charge, the amount they will lend in relation to the value of the property and the amount of rent needed to cover the interest. Over the past few years GMAC have declared war on all three of these checks on irresponsible borrowing.

GMAC's new mortgage product means investors can borrow over 30% more than they could with a typical buy-to-let loan.

For Example:

1 Acacia Avenue can be rented for about £10,000 pa. An investor goes to his bank and is offered a buy-to-let mortgage at 5.5% interest with 125% interest cover. To work out how much he can borrow from the bank the investor does the following calculation:

Rent / Interest Cover / Interest Rate = Maximum amount available to borrow.

With rent of £10,000 the investor can borrow £145,454 against 1 Acacia Avenue.

If the investors uses a GMAC mortgage he can borrow £200,400. (£10,000/ 100% / 4.99% = £200,400)

Investors can therefore now borrow £55,000 more than they could before, against exactly the same property with exactly the same rental income.

Both mortgages will be subject to loan-to-value criteria and GMAC at present are sticking to 85%. However, most of GMAC's other buy-to-let products go up to 89% LTV - it is probably only time before this LTV is relaxed as well.

In the perverted logic of today's speculative property market value is often simply related to how much the buyer can borrow to buy it. Aggressive mortgage lending ultimately affects prices so the LTV ratios become immaterial. GMACs only remaining check on these mortgages is therefore a cursory one that rapidly becomes irrelevant. Speculators will keeping paying more for their prize so long as they have money at their disposal.

The launch of GMACs aggressive new mortgage product is likely to trigger a price war in the buy-to-let market with other mortgage companies following suit. This could set a new lower benchmark for buy-to-let mortgages even in the face of two rate rises last year.

The GMAC mortgage is also likely to be used by speculators to refinance their existing properties - something they couldnt previously do because rents are at record lows in comparison to property prices.

The 100% interest cover (IC) on such a low interest rate will inevitably encourage over-borrowing. At 100% IC there is little margin for error. At this level investors will have to subsidise their properties as they still have to pay agents fees, maintenance, service charges, insurance, let alone covering void periods. Dubious rental valuations will also cause the speculators considerable pain.

In case you doubted it GMAC aren't fools, they specialise in the aggressive "create and trade" philosophy of mortgage lending. This means that within weeks of speculators taking out these outrageous loans GMAC will have sold them onto a greater fool. It may concern some of you that the risk for most of GMACs loans often end up with the likes of Bradford & Bingley and Brittania Building Society (a mutual!).

The bowler-hatted chaps have been GMAC's biggest clients, buying billions of loans from them over the past few years. As recently as November Bradford & Bingley was "pleased to announce" that it had purchased a mortgage loan portfolio from GMAC-RFC for a consideration of around £670 million.

This is yet another sign that we are now entering the final phase of a classic speculative bubble. Those who believed the property market had peaked have underestimated just how ingenious mankind can be when deceiving itself, no more so than when it is in the grip of a get rich quick fantasy.