The world is full of overstatements – average films are described as blockbusters, mediocre footballers are called geniuses, and reality TV karaoke singers are called superstars. But one thing that cannot be overstated is the success of buy-to-let (BTL) mortgages.
Buying property to let has been one of the personal finance success stories of the last decade as ordinary people have been given the opportunity to become property investors, attracted by the potential for good capital growth offered by the housing market.
Figures compiled by the Council of Mortgage Lenders (CML) show that the number of BTL mortgages increased from fewer than 29,000 in 1998 – when it began officially monitoring the sector – to more than 700,000 in 2005. The figures do not record the amount of lending in 1998, but a year later in 1999 when the number of mortgages had already more than doubled to over 73,000, the market was worth £5.4 billion. In 2005 that lending figure had grown again. This time to £73.4 billion.
There were plenty of clearly visible reasons for this growth. These were times of affordable property prices coupled with low and stable interest rates. It was also a time when equity markets were struggling and property was seen as the newest investment opportunity.
But as with every market, BTL does not stand still and as we end Q1 2007, however, the sector is going through huge changes. It was never the pot of gold that some unwary investors who entered the market with short-term goals thought it was, but more than ever before, successful investing in BTL takes careful planning and good attention to detail from the investor. There are still opportunities to invest well and achieve growth, but borrowers need to be shrewd in their choice of property and equally discerning in their selection of lender to ensure their funding fully meets their needs.
Priorities
Although there is little doubt that the most important single decision in making a successful BTL investment is choosing the right property, the right choice of mortgage to fund the investment is emerging as a greater priority. This is in no small part due to the advances that have been made with BTL products and as the market has changed so has the types of mortgages required. It is an environment that specialist lenders in particular are familiar with. After all, they have been built on a foundation of finding solutions for borrowers with complex credit circumstances and they are well placed to transfer these skills to provide products for customers with more complex investment requirements.
The line between mainstream and specialist lending in the residential sector has been blurred for a long time. Where once providers could simply split the market into prime and adverse credit, those black and white divisions no longer apply. Many mainstream lenders reject customers with minor credit problems, so specialist lenders have stepped in with highly competitive light adverse products. By the same token, conforming customers with more complicated income patterns, such as the self-employed or those working multiple jobs, are discovering that specialist lenders can provide solutions that are tailored to their specific needs, rather than having to squeeze their circumstances to fit the more rigid criteria of traditional lenders.
For example, some recent products launched by specialist lenders in the prime BTL sector combine maximum loan-to-values (LTV) of 90 per cent when supported by 125 per cent rental income confirmed by a letting agent, or up to 85 per cent LTV and 110 per cent rental income when confirmed by a valuation. Rates start from a highly competitive 5.50 per cent and are available for remortgage, purchase and first-time buyer BTL customers as well as portfolio landlords. These specialist products also offer an array of flexible features including the option to overpay, which then builds up a payment pot from which the borrower can borrow back, perhaps to fund work on the property; make underpayments, perhaps while the property is between tenants; or even take a payment holiday equal to the total amount previously over paid.
Of course, as specialist lenders have developed a more pragmatic underwriting approach gained by working in the non-conforming residential and BTL, they have the experience and the expertise to find solutions for unique situations, such as borrowers that have complicated income patterns or self-employed workers.
Bottom line
The bottom line is that as BTL has matured, the market has opened up to many investors with more complex requirements and so many BTL borrowers now need more than a commoditised ‘tick box’ approach – and this is something that specialist lenders are more attuned to providing. As the mortgage market, and in particular the BTL market, continues to develop and evolve over the months and years to come, it will be the specialist lenders with their tailored, customer-focused approach that will thrive. And that is certainly no overstatement.
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Current BTL trends
c Location
Where once the cosmopolitan centres of London and the big cities of Manchester, Liverpool and Birmingham were the places to buy – particularly in the booming flats and apartments sector – investors may now be better advised to look out of town to areas of stronger employment and lower property prices, which in turn translates to more affordable rents.
c Tenant demographics
The biggest demographic for would-be renters is the 18 to 30 year-old working professional; people early in their careers. However, smart inner city pads are now far too costly for the average tenant to rent and workers are being forced out of the metropolitan areas by the high cost of living
c Rental yield
The balance between income and outgoings has shifted in the past few years so that the yield landlords get has dropped significantly. In the boom time of the early 2000s investors were getting 6 per cent or even 8 per cent yield. Today that has dropped to less than 5 per cent, with the Royal Institution of Chartered Surveyors (RICS) recording an average yield of 4.6 per cent in October last year compared with 4.8 per cent the year before.
c Performance
The downward trend in yields does not seem to have impacted on borrowers’ ability to pay their mortgages, however. Of the estimated 11.6 million mortgages currently active in the UK, around 6.6 per cent of those are BTL loans. Of that slice of the total mortgage market, only 0.68 per cent of BTL loans are in arrears, according to the CML, which translates to just over 5,000 BTL mortgages. This shows that, by and large, the rental market is still operating well and that BTL borrowers continue to approach the sector with their eyes open and are well aware of their repayment responsibilities.
c Interest rates
The increase in interest rates is a double-edged sword for BTL investors. Higher interest rates may make their mortgages more expensive, but they also mean that would-be first-time buyers are again priced out of the property market and have to abandon their plans to buy and have to continue renting.
c Outlook
Steady and positive. RICS has found an increase during the last quarter in the number of people instructing surveyors to undertake reports on potential BTL properties, admittedly at a slower rate than the previous quarter, but sustained growth none-the-less.
