The buy-to-let (BTL) market has been heralded as the boom market of the past decade. Since the inception of the BTL 10 years ago, the sector has grown considerably, with confidence and interest soaring over recent years.
Changes in the sector have brought it closer in line with conventional residential mortgages. Once seen as a very limited market, more and more lenders are now operating in BTL as it provides a lucrative market for eager lenders, brokers, and borrowers.
Rapid growth
In a study of the market, Alliance & Leicester revealed that BTL had grown rapidly, with its own business levels up 25 per cent from November to December 2006. The research also indicated that many of its BTL applications were for products under 75 per cent loan-to-value (LTV). The average deposit raised by landlords continued to increase – to £82,000 – which represented 36 per cent of the average property price for a BTL mortgage under 75 per cent LTV.
Commenting on the findings, Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, said: “We are continuing to see an increase in BTL applications, with figures on an upward trend right up until year end. This seems likely to pave the way for solid growth into 2007 for this market. Investor landlords are seeing a very buoyant BTL market, with the average property purchase price in December at £230,806.”
Alliance & Leicester also revealed that the majority of BTL mortgages taken out were fixed rate deals, although there was a growing trend towards tracker rate products. The research revealed 61 per cent of landlords opted for a two or three-year fixed rate product, down from the November findings of 69 per cent.
He added: “In a rising Base Rate environment, figures show that some investor landlords are beginning to opt for Base Rate tracker mortgages, which are competitively priced at between 13 and 38 basis points below fixed rate mortgages. While trackers may not be right for amateur letting investors, many professional landlords are in the fortunate position to be flexible with their finances and able to withstand fluctuations in the Base Rate.”
Lender enhancements
Although doubts remain over the fees attached to BTL mortgages, the transparency and diversity of the products being offered by lenders mirrors the traits seen in the residential mortgage market. Although the next step for BTL seems to be regulation – or at the very least, tighter controls – many lenders operating in the sector have already adopted many of the features of residential lenders and have their own controls in place to ensure responsible lending practices.
As Richard Stokes, director of product and lender development at The Mortgage Times Group, says, the BTL market has developed working practices that reflect the wider market, which has benefited lenders, brokers and borrowers. “We have certainly seen the BTL growth continue this year. We strongly believe this is down to the gathering momentum for landlords to add to their portfolios after enjoying success first time around, and indeed the expiry of the keen benefit periods we offered two to three years ago.”
Stokes added: “This forward momentum has been fuelled by the relaxation in underwriting. At the forefront is the widespread use of earned income either to cover rental shortfall or on a self-certified basis to cover the mortgage balance. This is further supported by the willingness of certain lenders to assess affordability on the basis of exist-
ing AST figures. The future is bright as these innovations are here for the long term so we are no longer beholden to Bank of England repo rate decision that drove the traditional rental coverage factors.”
As a result of changes in business practices to fall into the line with the market, brokers are now much keener to get involved in this sector. Indeed some now operate exclusively in this sector, dealing with high net worth clients – an area that has seen growth. Rather than new landlords and property investors in the market, research by a number of lenders has indicated that much of the activity in the BTL sector has come from those already active in the market with growing portfolios. As a result a number of lenders have also extended the portfolio limits on their products, while others have removed this limit altogether.
The diversity of the market has also allowed lenders to innovate with their product designs. Rental income has, in many cases, been reduced from the normal rate of 120 per cent, to 110 per cent, and in some cases 100 per cent. Although this means that the landlord will have to ensure their property is rented out from the offset in some instances, it adds another string to a lender’s bow and has opened up BTL to a whole host of new borrowers keen to get involved in this bustling market.
Potential pitfalls
However, growing calls to regulate estate agents could have some impact on the BTL market. With a growing number of borrowers looking at BTL, in addition to current landlords looking to expand their portfolios, the role of the estate agent has come under greater pressure. With increasing demand in the sector, a number of industry commentators have called on the Financial Services Authority, or similar body, to formally regulate estate agents. While the BTL market has seen a rapid growth, a number of people have suggested regulation of estate agents could help to further increase consumer confidence and bring more people into the sector.
Changes to the Consumer Credit Act (CCA) have also raised concerns. The CCA is currently under reviewed by the Department of Trade and Industry (DTI) and could see small landlords come under regulation, it has been claimed. Although the final details have yet to be published, Accord Mortgages has already revealed it will be holding back its BTL proposition until the implications of the CCA review are clear. However Sue Anderson, head of external affairs at the Council of Mortgage Lenders, said the early indications were that BTL would be excluded from the CCA.
“We’re getting fairly positive indications that the DTI wants to keep BTL out of the CCA as it is not consumer lending. We’re not expecting it to be a problem,” she said.
John Heron, managing director of Paragon Mortgages, argued that it was too early to tell what the final picture would look like.
“There is some debate about the degree to which BTL mortgages might be covered by the CCA and we’re waiting for the DTI to clarify its position.”
Market catalysts
The growth of BTL has been fuelled by continued uncertainties around pensions and an increasing consumer desire to see a healthy return on investments. While the stock market was once viewed as the main prospect for generating and increasing income, interest has now waned. For many, property is the most secure way of securing and enhancing income, with property prices in general expected to increase by between 4-6 per cent each year. Indeed in 2006 property prices rose by 10 per cent, a trend that looks set to continue, albeit to a lesser degree. With a continued pensions crisis in the UK, many also view property as a way of securing money into their retirement. Property is viewed as a secure way of improving money into retirement, with a major property crash unlikely.
However, while the BTL market has grown, the first-time buyer market has contracted, with many typical first-time buyer properties being bought up by investors. With rising property costs it is also becoming increasingly difficult for first-timers to enter the housing market. Michael Coogan, director general at the Council of Mortgage Lenders, said: “Month-on-month we see affordability constraints becoming more pronounced for first-time buyers. But they are clearly still keen to get on to the property ladder despite the growing financial hurdles, and it is essential that anyone wanting to buy their first home looks carefully at their finances and take a realistic view as to whether they can afford the costs of home ownership if rates rise.”
However, as well as first-time buyer restrictions, a greater number of people are opting to rent due to the freedom it allows. With job security less so these days, and the fact that people are not afraid to move around the country for employment, the need for flexibility has increased, providing landlords with a captive audience in major UK cities.
With different elements combining to push the market forward – from changing social and economic conditions, to product diversity and technological enhancements – BTL provides a valuable avenue for brokers keen to get involved in the ever growing market. With house prices likely to continue their upwards spiral, more people will be forced to rent, providing a fruitful sector.
