There is no doubt that buy-to-let is one of the biggest success stories of the mortgage industry over the last decade. This sector is now worth an eye-watering £84 billion and represents 8 per cent of all mortgage lending. What’s more, buy-to-let is still growing with no sign of abating. But how can investors, intermediaries and lenders capitalise on this growth and what new opportunities are there to expand the market further?
Shift of investor focus
It is important not to overlook the fact that the phenomenal growth in the buy-to-let market in recent times demonstrates a different perspective on what this investment now offers. One possible contributing factor is that, traditionally, buy-to-let was seen as an income-providing investment with the attractive bonus of longer-term capital growth. But this view has shifted and many more now see it as a capital play with any income being regarded as an additional benefit rather than an intrinsic fundamental element. In the past, mortgage lenders have relied on rental income from buy-to-let investments to demonstrate a borrower’s ability to service the debt. But the market has shifted and providers of buy-to-let mortgages are starting to respond accordingly.
New opportunities
Canny lenders are spotting the increasing number of potential and existing investors looking for standalone capital appreciation. For these investors who are often prepared to cover any mortgage payments during rental void periods themselves, the traditional buy-to-let mortgage – which requires proof of rent that covers the mortgage payments by at least 100 per cent, and as high as 130 per cent – is not the most appropriate product. Professional investors, and their lenders, are increasingly taking a ‘whole portfolio’ perspective so the void on a property by property basis becomes less relevant. Providing the combined incomes supply sufficient funds to service the debt across the portfolio the landlord, and the lender, can take a more relaxed stance than if the borrower is reliant on one tenant to service one mortgage repayment.
The challenge for the industry going forward will be to make sure that this new breed of borrower is fully catered for, through propositions that do not require investors to prove that they can cover the mortgage payment simply by evidencing their rental income.
To meet this new market’s needs, lenders could choose to take a different view on their assessment of investors and their ability to service their debt repayments. We now place higher emphasis on the property investment and management experience of individual landlords. Our experience tells us that if investors can demonstrate that they have successfully managed three or more properties, and made all payments on them, then this is a better indicator of credit risk than a piece of paper confirming rental income.
Fuelling growth
The supply and demand dynamics of buy-to-let from both tenant and landlord perspectives is boosting growth. Increasing immigration, changing lifestyles, diminished provision of social housing, smaller households and the lack of affordability means more people are renting for longer. And investors will continue to enter and stay in the market due to the British public’s love for bricks and mortar, healthy rental yields and mistrust of other types of investments.
The industry’s ability to react and adapt quickly to new trends is one of the main reasons the buy-to-let sector has continued to develop and grow at the pace it has. Lenders – whether they be the latest raft of new entrants or the more established players – are doing their part to help the buy-to-let market flourish.
