A very timely post so far as I am concerned.
The paperwork to apply for one of these loans just arrived in my inbox.
Here is my thinking on the issue of funding buy to lets through this type of lending generally and looking at my own example.
The property I am looking at will cost approx €200k and yield approx 10%. That is rented to sharers, requiring a bit of effort. Effortless (you hope) renting to a family would yield about 8.5%
The property is an ex council house, convenient to a university and hospital so should always have a supply of tenants. It is also convenient to shops, busses, schools etc. The area certainly had a reputation as a bit rough in the past but realistically nowadays has no more problems than anywhere else.
The property is suitable for use in letting long term. There will always be people coming to the hospital or university for a few years who want to rent and not buy. They will always be interested in a place where they can walk to college or work and to Dunnes, Lidl and even to Mass. There is little or no prospect of either the university or hospital closing, the area is already well built-up so little prospect of large scale new development.
Costs of letting including a charge for renovations, will come to no more than €2k per annum, so my 10% becomes 9%.
A long term IO loan to fund this makes perfect sense. Interest is a cost of a rental business. While the landlord is entitled to a profit, under the traditional model the cost of capital repayments, are in effect passed on to tenants. (Think this is similar to the point made by The BS on an other thread) That is hardly reasonable on the tenant, and in effect it requires the landlord to plough his profits back into repaying the capital, maybe he would prefer to spend his profits some other way, and why shouldn't he.
My 9% yield now needs to cover the interest 5.45%, so I am left with 3.55%. However due to the restriction on interest expense, the taxman looks at this as 4.64% profit. Given that I am a higher rate taxpayer that means the taxman wants 2.32% leaving me with 1.23% (The reader may multiply these per centages by 2,000 to convert to Euro if that seems easier).
My conclusion, the return is very low for the effort involved. The main problem is that the tax is too high, don't forget that over half of every Euro paid in rent goes to the tax man. (Certainly for a new buy to let. There may be historic landlords who aren't paying 50% tax but no one getting a BTL mortgage today is.)
Of course a low return is to be expected. ICS no doubt have calculated the rate so that they capture as much of the yield as possible.
If the market thought that the interest rate was low and that there was good profit to be made, the price of the BTL property would go up.
No sensible person would take up a BTL at these rates unless they thought that property prices were going up, or rents were going to rise, or that they could remortgage at a much lower rate in the near future, or for some other reason outside the normal letting business case.