When the mortgage market is going through uncertain times with even the UK’s number one lender HBOS supposedly at risk from rogue stock market traders it is inevitable that specialist sectors such as buy-to-let (BTL) come under intense scrutiny.
The BTL sector is undoubtedly facing uncertain times as lenders take fright and focus on the supposedly safe and risk-free mainstream market.
However, in periods of uncertainty the industry has a duty to focus on the fundamentals. And the fundamentals in the BTL market make a strong case for not panicking.
There has been a shift towards privately rented housing, with one in eight homes in England now owned by landlords. That fundamental change has been supported and enabled by creative lenders designing product solutions to meet the needs of landlords.
Taking the rational approach
The mortgage market is nothing if not a long-term market with customers taking out loans for 25 years or longer. In such a market the rational approach is always to look to the future and stay alert to potential new developments. The next major event is the one to look out for and there can be a tendency to ignore recent history.
In the current economic climate this is potentially even more important – nobody wants to be caught out. However, focusing purely on the future when events are so unpredictable risks forgetting the solid basis on which much of the industry is built.
The BTL market has inevitably come in for criticism as panic builds about falling house prices and a lack of new mortgage deals.
As lenders cut back on the products and the terms they are willing to offer, something has to give. The argument would be that BTL is one area which the industry should be turning away from.
Responsible lenders will have always had risk control at the forefront of their minds and will have sought to balance risk with ensuring that their businesses can continue to grow. Financially strong lenders will have defended their reputations jealously.
GE Money Home Lending (GEMHL) analysis shows that the BTL market demonstrates these characteristics.
Our research based on Council of Mortgage Lenders (CML) and Land Registry data shows that while the average size of an outstanding BTL mortgage has increased, it has risen at a much slower rate than the average property price, which indicates that many landlords are paying off their existing loans.
Rental fundamentals
Before assessing the market it is essential to understand the scale of the market. Approximately 2.6 million properties in England are privately rented – that equates to around 12 per cent of housing stock. Many of these properties will have been financed through BTL mortgages. Indeed GEMHL figures show the BTL mortgage market has grown by 690 per cent between 1999 and 2007.
The regional picture is varied – in London, for instance, 22.8 per cent of homes are privately rented compared with just 4 per cent in the North East of England.
Strong BTL sector
Our research shows that between 2000 and 2007 the average size of a new BTL mortgage increased from £80,579 to £129,096 – that is an increase of £48,517, or 60.2 per cent.
It has not, however, been a story of remorseless rises year-on-year as lenders dole out bigger and bigger advances. In fact, 2002 and 2004 showed a drop in the size of the average BTL mortgage compared with the previous year.
In 2001 the average BTL mortgage was £95,568 and in 2002 it was £93,846 – a drop of 1.8 per cent. In 2003 the average mortgage was £102,345 and in 2004 it dropped to £100,487 – another decline of 1.8 per cent.
Certainly there have been years showing large increases but to some extent that mirrors rises in property prices.
Similarly there has been a massive increase in the number of new BTL mortgages advanced. In 2000 there were just 48,400 – by 2007 that had increased to 350,900.
The increase again is however not a straight line of year-on-year increases. There was a massive boom in 2001 to 2002 when the number of mortgages advanced increased by 80 per cent and from 2006 to 2007 when there was a 66 per cent increase.
However between 2004 and 2005 there was a drop in the number of new BTL mortgages from 225,900 to 223,000 – a modest decline of 1.3 per cent, but a decline nevertheless.
The message is clear – the BTL market has expanded rapidly from a relatively modest size to a relatively substantial size. However growth is not uniform year-on-year.
Outstanding BTL
We estimate the average size of an outstanding BTL in 2007 was £117,528. Compared to 2000 when the average outstanding loan was £75,644, this shows growth in the amount actually owed of 55.3 per cent.
Certainly growth of 55.3 per cent over seven years sounds pretty impressive. It equates to around 6.47 per cent a year which is a good annual pay rise.
However when it is related to property prices the statistics are put in their real context. Property prices between 2000 and early 2008 have increased by 80 per cent from around £103,115 to about £186,045 – a rise of £82,930.
That tells a story of landlords paying off loans and lenders taking a sensible stance of not doling out cash regardless.
The average size of an outstanding BTL mortgage has increased but at a much slower rate than the average property price which suggests that many landlords are paying off or reducing their existing loans.
Look to the future
In a long-term market we should always be looking to the future. Visibility at the present may be extremely limited and many industry participants will be looking merely to staying afloat in the current stormy seas.
However the growth of the BTL market – and the evidence of demand for private rented properties – demonstrates that while the past seven years has been impressive there may still be more to come.
For instance, between 1996 and 2006 the number of privately rented homes in the North East has grown by 47 per cent, from 72,000 to 106,000 while in the West Midlands the number has increased from 179,000 to 199,000 for an 11 per cent increase.
The BTL picture is certainly not a matter of black and white. There are shades of colour among the monochrome indicating that while some areas may decline, others will grow. What is clear is that consumers need advice as never before.
Mortgage intermediaries, packagers and distributors, with their long-established experience, are ideally placed to provide that expertise.
