Business Moneyfacts has looked at how successful BTL has been in achieving its original objectives and what the future holds for the residential investment sector. Senior researcher Alan Harper commented: “Buy-to-let was a label created by the Association of Residential Letting Agents (ARLA) in the autumn of 1996 at a time when the UK had come out of a lengthy recession. There was a shortage of good quality affordable housing in the country and a lot of people had fallen into the trap of buying properties they couldn’t really afford.
“Assured Shorthold Tenancy agreements had also come about, which gave landlords and mortgage lenders greater levels of protection than they’d had previously. So the timing was perfect for a boost to be given to residential property investment.
“ARLA’s objectives in coming up with the buy-to-let identity were to bring good quality property back into the market and to bolster the notion that property investment was widely accessible to private individuals, rather than just specialist property businesses. Buy-to-let has far exceeded those original aspirations. The quality of finish and internal fittings in rented accommodation is now far higher than ten years ago and living in rented houses is much more socially acceptable as a consequence.
“As demand for tenanted property has increased, so people began to appreciate that residential property represented an authentic investment opportunity, both in terms of capital appreciation from increasing house prices and as a source of a regular income from rental payments. Mortgage lenders were not slow to react to this demand and, as time went on, more and more started to offer bespoke buy-to-let mortgages as part of their mainstream mortgage product ranges, now including 14 non-conforming lenders. By the end of 2005 there were over 700,000 buy-to-let mortgages outstanding in the UK.
“Already this year we have seen eight additional intermediary lenders enter the market, and several direct lenders, most recently Alliance & Leicester. Moneyfacts now lists details of over 1,500 different buy-to-let mortgage products. In terms of product numbers available, this represents a seventy-five-fold increase from the two dozen available in this sector nearly a decade ago; by any standards a phenomenal rate of growth.
“Bank of England base rate was then 1.50 per cent higher than now but the most competitive variable rates were around 2.25 per cent to 2.50 per cent more expensive than their modern day counterparts. But many lenders have hiked the product fees considerably since then, in line with the mainstream mortgage market.
“Over time buy-to-let lenders have relaxed their lending criteria, partly as a result of increased competition but more so a result of the stability and growth of the property market. Many lenders now have sophisticated products, allowing mortgages on large property portfolios, or a choice between products which combine high fees and lower interest rates, and vice versa. The amount lenders are prepared to advance as a proportion of the property value has also increased over time, while the minimum rental cover has fallen from around 130 per cent to 150 per cent ten years ago to an industry average of 125 per cent today; opening the market to a much wider audience.
“All the pointers are that buy-to-let will continue to grow. The average age at which first time buyers enter the housing market is increasing and properties in some desirable areas are affordable to many only if rented. These and other factors all point to a continuation of growth in the sector. Even the ever-increasing burden of legislation is unlikely to dampen enthusiasm for residential property investment. Buy-to-let is here to stay.”
