The buy-to-let (BTL) market has seen a dramatic resurgence in the market over recent years, boosted by changing social and economic conditions.
BTL lending now accounts for a huge proportion of all mortgage lending, and this success can be attributed to a number of factors. Central to the growth of the BTL market has been ever increasing house prices. As properties are becoming less affordable, more and more people – individuals, couples and families – are being forced to rent, rather than buy.
With house prices predicted to increase by a further 7 per cent in the next two years, more people will be forced to consider the rental option. Despite the move by lenders to adopt an affordability based approach to lending – in most cases enabling the lender to stretch its calculations and lending criteria – it remains the case that many people are unable to step onto, or move up the property ladder.
However, the rental market is also driven by an increasing number of people who choose to rent because of the flexibility it provides. With the employment market less secure, and a host of opportunities for work available across the country, many are realising the benefits of the flexible nature of renting. While 10 to 15 years ago, young people aspired to own their first property at the earliest opportunity, this is now being delayed.
With rising costs of living, individuals’ desire to travel or to spend their money on other things, be it a car, holiday, or funding their choice of lifestyle, many are deferring their chance to step onto the property ladder until later on in life. Indeed in mid-2006, the Council of Mortgage Lenders (CML) showed that the average age of a first-time buyer was 34, indicating the changing trends inherent in the housing market. For those already on the property ladder by this point, home improvements and expansions, rather than moving, have become key, as the step in price between a first and second home becomes wider.
Investing in the future
Because of the changing social conditions, those that can afford to buy property are increasingly turning to the BTL market. Becoming a property investor is a fast growing sector. For many it is viewed as a way to supplement their income, or help with their post-retirement funds.
With growing uncertainties over the future of pension provisions, a greater number of people are turning to property as a way to supplement, or secure future earnings. While the stock market remains slightly volatile, property is, at the moment, viewed as a guaranteed entity that will increase in price. Although in the future this is uncertain, with a housing crash possible but improbable, housing stock is the most secure way of obtaining future earnings. Commenting on the future of the market, Claire Burston, partner and head of the consumer finance team at Penrose, said: “People are becoming increasingly aware of the need to supplement their existing savings prior to retirement and this will result in a boom in the BTL market according to the brokers we have surveyed. In addition, house prices are preventing young people from buying and will further fuel the market by a demand for rental properties.”
Tim Hague, managing director of mortgages at BM Solutions, added: “People are actually making a conscious decision to rent rather than buy.
“The BTL market has experienced consistent growth over the last 10 years. More and more people now see letting property as an achievable investment and an important part of a balanced investment portfolio.”
Lender entrants
As demand from consumers has grown, more lenders are entering into the market. Some have taken tentative steps into the market, while others have launched a raft of products to appeal to potential landlords. Over the next year it has been predicted that lenders will begin to relax their criteria, as they become more comfortable in this arena. Although this poses questions over the regulation of the market, lenders have proved they can operate within controls and operations that reinforce legitimate and responsible lending. Although some have called for the regulation of the BTL market, its emergence, and evolution has taken many of its processes from the regulated markets of already regulated residential market.
Because of the increased demand, brokers have had to adapt their propositions, with many forging a path into the BTL market. Indeed, some intermediary firms have taken the decision to provide a BTL only service, dealing exclusively with high net worth clients. Mortgage lenders have extended their product ranges and offerings, allowing more properties on landlord portfolios, while at the same time reducing rental calculations, subject to the borrowers’ needs and individual financial situations. Rental income has been reduced by some lenders from 120 per cent to 110 per cent, and even as low as 100 per cent. Although this poses a risk to affordability, if the property is not lived in, it allows greater flexibility for borrowers looking to obtain a BTL mortgage.
Coming of age
Speaking at the Mortgage Introducer BTL Forums, in association with Mortgage Times, Brian McDermot, head of national accounts at The Mortgage Business (TMB), said: “The CML reported that the value of BTL loans extended to landlords reached £17.5 billion in the first half of 2006. BTL has definitely come of age, and is now a major sector in the mortgage market.
“Historically the change in law strengthened landlords’ rights relative to tenants, and helped bring an end to the decline of the housing sector in the 1980s. It also gave an people an incentive to invest in property.”
He added: “There is a massive potential for the student market to grow, along with the BTL market as a whole. It is currently dominated by small sale investors, but the future influences will be rental income and capital growth. There is a very clear demand for BTL mortgage business.”
Looking at the coming year, it seems the BTL market is set for increased growth and activity from mortgage lenders, and borrowers keen to forge a path in this lucrative area.
Nicola Severn, communications manager at Mortgage Trust, commented: “BTL brokers are extremely optimistic about 2007, and they have good reason. With immigration and changing social attitudes all set to continue to contribute to high levels of rental demand, and product innovation likely to develop on the back of increasing lender competition, it is no wonder that investors are expected to increase their BTL activity. Although further interest rate rises may be a reality in 2007, the vast majority of BTL borrowers will not be deterred from looking to expand their portfolios. Many consider finance costs to be part and parcel of their overall investment plan and are prepared for such developments.”
John Heron, managing director of Paragon Mortgages, added: “As existing investors purchase additional properties, new landlords enter the market and some borrowers remortgage their portfolios, we’ve seen excellent growth in our BTL lending business, which was 82 per cent higher in our 2006 financial year than in 2005.”
“Intermediaries have also been enjoying good business from BTL. According to our research, they receive an average of £428 on each case – that amounts to almost £55,000 per year, and many generate much more. With 14 per cent of intermediaries’ activity representing BTL business, this is an important source of earnings for them and will remain so in 2007.”
Here to stay
It is clear that the BTL market is here to stay. The sector provides a fantastic opportunity for intermediaries eager to expand their proposition and appeal to a wider range of borrowers. With more and more people looking at property investment and development as a means of investment, a career, or a hobby, the buy-to-let sector can look forward to excelled growth. Mortgage intermediaries should see the BTL market as central to their business plans, with more and more people certain to enter the market, and those already active keen to expand their property portfolios. Although intermediaries need to be aware of the differences in product design and the issues relating to rental income and yields, the BTL market presents a clear opportunity for brokers.
