The buy-to-let (BTL) market has continued to experience outstanding growth since it began trading in the early 1990s and BTL property investment has emerged as one of the best performing asset classes in recent years, providing a readily acceptable and financially viable alternative to other financial investments.
According to recent research the BTL industry is now worth a staggering £84 billion which represents around 10 per cent of total lending within the mortgage market as a whole.
download our news ticker
Private rented housing is an essential and growing sector within the housing market representing around 12 per cent of all households and 11 per cent of housing stock according to recent research. There are a number of reasons why the rental market continues to flourish and why private renting offers advantages over owner-occupation.
Private renting provides an important resource for younger households who may struggle to afford to get onto the housing ladder or are waiting longer before they settle down. It also provides flexibility and accessibility to the influx of immigrant workers from Eastern European countries and to those whose job or career requires frequent relocation within the UK. These are just a few of the factors that contribute towards the continued success of BTL.
Regulation question
As a result of the BTL market performing so well, questions have been raised as to whether or not there is the need for BTL mortgages to be regulated by the Financial Services Authority (FSA) and it has become a popular topic of debate among experts. The fact remains, however, that BTL mortgages are generally seen as commercial transactions; a business investment undertaken, in the majority of cases, by shrewd and professional investors who are fully aware of the risks involved and not in need of government protection.
That said, it is inevitable, given the great opportunity that the BTL industry provides, that unscrupulous operators will be attracted to the market; for example, slum landlords treating tenants unfairly or exploitative mortgage advisers offering poor advice for the benefit of their own pockets. These risks have not gone unnoticed by the government and we have seen the introduction of new legislation governing the housing market which has set out specifically to address the problems that may affect landlords and tenants in an effort to protect the parties involved.
catch up on the industry buzz
The Housing Act 2004 is the key piece of recent legislation affecting the BTL industry. It contains a wide range of measures aimed at protecting those most at risk in society whilst creating a fairer housing market for all those who own, rent or let residential property. The Housing Act 2004 therefore sets out to protect landlords and tenants alike. Perhaps the most significant of the new rules are those encompassing the licensing of Houses in Multiple Occupation (HMOs), the Housing Health and Safety Rating System (HHSR) and the introduction of Tenancy Deposit Protection (TDP) schemes.
HMOs
The licensing of HMOs came into effect in April 2006 and stipulates that, in most instances, landlords who let HMOs obtain a license from the local housing authority. The aim of introducing HMO licensing is to raise the management and amenities standards of accommodation for those tenants living in shared rental property. HMOs provide affordable housing for many young and vulnerable tenants, but sometimes they provide the worst housing standards with common problems such as overcrowding, inadequate fire safety standards and poor management.
get the daily news delivered to your inbox
Landlords of licensable HMOs will benefit from support by local housing authorities which should help them to manage their properties more effectively and they will be able to provide tenants with a certain standard of accommodation. Consequently reputable landlords will no longer have to face unfair competition from those who undercut rents and offer inferior accommodation.
HHSR
The HHSRS also came into effect in April 2006 and replaced the Housing Fitness Scheme as the government risk assessment procedure for residential property. HHSRS has been designed to assess the potential risks to health and safety of occupants in residential accommodation with the aim of making homes healthier and safer to live in.
Both the licensing of HMOs and the introduction of the HHSRS are good news for the BTL industry as this type of progressive legislation will serve only to improve the health and safety standards of BTL properties and increase the level of professionalism of those operating as landlords within the housing market.
TDP
The most recently implemented part of the Housing Act 2004 affecting tenants and landlords is the introduction of TDP which has been enforced as of April 2007. This is another example of how government policy is providing for the strengthening of the private rental sector by improving the standards by which landlords manage their properties and tenancies.
From 6 April 2007 any landlord in England or Wales who takes a deposit, up to the level of £25,000, for an Assured Shorthold Tenancy (AST) must ensure that the deposit is protected by a TDP scheme. As ASTs are the most common form of tenancy in England and Wales, this new legal requirement is likely to cover the vast majority of new tenancies.
find the latest house prices
Again, this piece of mandatory legislation reflects the government’s commitment to protecting those at risk in society, and in this case, protecting those in rented accommodation against the small minority of unscrupulous landlords or letting agents who misappropriate part or all of their deposits.
There are three companies that have been awarded contracts to run the government’s TPD schemes and the three schemes are as follows:
- Tenancy Deposit Solutions Ltd (TDSL) is an insurance-based TDP scheme provided by a partnership between the National Landlords Association and Hamilton Fraser Insurance. The landlord retains the deposit paid by the tenant but pays a premium to TDSL. At the end of the tenancy the landlord returns the agreed amount of the deposit to the tenant. If there is a dispute, the landlord must hand over the disputed amount to TDSL until the dispute is resolved. If the landlord fails to comply, the insurance arrangements ensure the return of the deposit to the tenant if they are entitled to it.
- The Tenancy Deposit Scheme (TDS) is also an insurance-based tenancy deposit protection scheme backed by the Association of Residential Letting Agents and provides a similar service to TDSL.
- The Deposit Protection Service (DPS) is the only custodial tenancy deposit protection scheme and is free to use. It is open to all landlords and letting agents. The landlord pays the tenants’ deposit into the scheme and The DPS is funded entirely by the interest earned on the deposits held. At the end of the tenancy the scheme will return the deposit, divided as agreed by both parties. If there is a dispute, the scheme will hold the amount until the dispute resolution service or courts have decided what is fair.
find the latest industry jobs
It has been suggested that some landlords will stop taking deposits in order to avoid the hassle of complying with TDP legislation. However, the collection of deposits provides a good safeguard and for many professional and large portfolio landlords, being able to take and hold deposits is a key part to the success of their business.
The introduction of TDP will have a positive impact on the BTL market. It provides an increased level of protection for landlords and tenants and helps to ensure that good practices are followed. With improved standards of accommodation, renting property will remain a popular alternative to owner occupation for a significant proportion of the population.
