The challenge for anyone commentating on the buy-to-let (BTL) market is to try not to use the ‘b’ word. For those who are unsure of what the ‘b’ word is, I’m afraid you’re going to have to wait until the end of this article to find out. Although, there was one in the Big Brother house a few years back and West Ham fans are forever blowing them.
The point is that the ‘b’ word just doesn’t seem relevant to today’s BTL market. This is now a stable and established part of the UK marketplace, of great importance to lenders, brokers and borrowers. The growth in the importance of the UK’s BTL market is clear from the latest Council of Mortgage Lenders’ (CML) figures issued in February.
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Over 330,000 BTL mortgages were taken out in 2006, worth a total of £38.4 billion, which represents nearly 12 per cent of all new lending. These strong figures represent 11 per cent of all new lending – a 48 per cent increase in volume and a 57 per cent increase in value over the previous year.
The figures also reveal that the total number of BTL loans has now reached 850,000, totalling £94.8 billion, an increase of 21 and 29 per cent respectively over 2005. Now, BTL lending represents 9 per cent of all mortgage balances, up from eight per cent in 2005.
But, what do these increases actually mean for the sector? Can we determine the trends behind the numbers and plot the future? New lenders have entered an increasingly competitive sector – so what can they bring to the party in terms of product design and innovation?
A fresh eye
As a lender that has been a relatively recent entrant, we have been able to view the sector with a fresh eye and our research has revealed a number of core market features behind this continued increase in BTL lending.
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We have witnessed a rise in the numbers of what we would call ‘investor landlords’. These are typically individuals who have one,two or three BTL properties and perhaps initially stumbled into the market rather than making an active investment choice.
This was because they may have inherited a property and chose to let it out rather than sell, or their children went away to university, and having decided to buy them a place to live rather rent, they now have a BTL property. By doing this they have tied themselves – in a good way – into the increase in equity appreciation we are seeing from housing stock in general.
These investor landlords have significant principal incomes but they do not get the majority of their income from their BTL properties. They also tend to have a minimal mortgage on their own residential property and are diversifying their wealth into bricks and mortar.
The mix between ‘investor landlords’ and, what we would term, ‘professional landlords’ – those individuals who have larger portfolios with a sizeable number of BTL properties – is also healthy. A few years ago we may have termed ‘professional landlords’ as those with two or three properties but increased house price inflation has been utilised and now these landlords have many more investments.
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Of course both ‘investor’ and ‘portfolio’ landlords have utilised the ability to remortgage and refinance their investments regularly. ‘Investor’ landlords particularly have been quick to use the equity gain from perhaps one property to invest further and increase their portfolios.
This leads on to a further clearly-defined feature of the sector - the overall demand for renting and therefore the increased interest in BTL as an area to invest in. The background to this is that society has changed and continues to change. For instance, we now have a much more mobile workforce, willing to move around because of their work.
We also have a significant increase in the migrant workforce. As new countries have joined the EU, this has allowed people from these countries to move and seek work here. A negative social connotation that has added to the numbers renting is the increase in the number of single person households – perhaps through divorce, etc. Another growing band of individuals looking for places to live is the growing student population.
Societal changes
These societal changes demand an increased number of places to live. We must not forget that the UK’s housing supply is not keeping pace in providing this level of housing. Add to this the fact that the UK population is living longer and the issues grow deeper. It seems likely therefore that these opportunities for landlords will remain and grow, with our ‘investor’ landlords continuing to provide an increasing number of the properties needed for these sections of society.
With the level of demand for rental properties increasing, the sector continues to look attractive and we see an increasing number of new landlords looking to invest. Increasing numbers of potential new landlords brings in new lenders who build and develop new products – this is of course beneficial to brokers and their clients.
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The perception by some lenders that the BTL market was somehow intrinsically risky and should be steered clear of has certainly gone. In terms of 80-85 per cent LTV products, these are now on a similar level to prime residential rates.
Our ‘investor landlords’ have no intention of reneging on the mortgage; there is a full commitment to pay the mortgage, whether that be through rental income or other means. This is perhaps why we see the proportion of BTL mortgages three months or more in arrears continuing to fall.
Pricing revolution
It is fair to say we are undergoing a revolution in BTL pricing and affordability with much cheaper products available. Lenders have acknowledged that a changing type of borrower, one not so reliant on rental income to pay the loan, requires different product features. Therefore we are seeing a greater number of products introduced which have lower rental cover requirements. With some products, rental cover is pitched at 100 per cent and with others there are no rental cover requirements at all.
The economic class taking out BTL products are increasingly savvy, well managed and in control of their debt. The lower risk that these individuals provide has had a knock-on effect in terms of pricing.
However, we may be seeing BTL products with similar rates to prime mortgages but there is a distinct difference in the fee level. These competitively priced products are not without risk and lenders are using fees to help cover this risk. So, where we have 85 per cent LTV products with only 100 per cent rental cover, the lender may levy a £2,000 fee to cover the greater risk.
The general view is that the love affair with BTL continues and the figures seem to bear this out. ‘Portfolio’ landlords will continue to be important and lenders may therefore look at the portfolio in its entirety rather than on individual properties.
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It is all about seeing the wider view. We have already seen an increase in the options available for those borrowers who may have one or two defaults or CCJs, with the opening up of the non-conforming BTL mortgage space.
We may also see lenders moving into a number of other BTL niche sectors, for example, lending to limited companies or non-UK nationals. This is a risk-based form of lending and these lenders will engineer the niches they’re involved in, for example, for those people who have no right to reside or non-UK taxpayers.
This market has been deemed a ‘bubble’ that could burst at any time – the fact is BTL has never been stronger.
