When the Association of Residential Letting Agents (ARLA) created the concept of buy-to-let (BTL) mortgages in 1996, it hoped to put the spark back into the recession-hit economy and create awareness among individuals of the investment potential of purchasing property. 10 years later, the sector is still booming with a growing number of lenders continuing to enter the frame in the hope of getting a generous slice of the BTL pie.
While one of ARLA’s original intentions had been to address the lack of good quality affordable housing in the UK, the success of the BTL market has far exceeded the association’s original expectations. The demand for rented property has grown substantially over the last decade and a change in cultural values among the UK population has also fuelled the market’s growth.
A wealth of opportunity
One of the reasons for the market’s success is that the introduction of BTL mortgages presented a wealth of opportunity to people who would have previously not considered property as an investment opportunity.
“Before buy-to-let, you simply weren’t allowed to let out your property or if you did, it was under commercial terms – a penalty loading of 2 per cent or more,” says Nick Gardner, director at Chase de Vere Mortgage Management.
In agreement with Gardner, Nicola Severn, marketing manager at Mortgage Trust, says: “The coining of the term BTL helped to increase the appeal of rental property to the wider market of individuals who perhaps would not have previously considered it to be a viable and workable investment option.”
Indeed, the opportunity to invest in property prompted something of a boom, and the BTL sector has continued to flourish ever since. The weak performance of the equities market since the turn of the century sent droves of investors hunting for alternative investment vehicles, and BTL presented an attractive solution.
“As demand for tenanted property increased, people began to appreciate that residential property represented an authentic investment opportunity, both in terms of capital appreciation from increasing house prices and as a source of regular income from rental payments,” says Alan Harper, senior researcher at Moneyfacts.co.uk.
The continued success and subsequent growth of the sector can be seen in the number of products and lenders now operating in the market. Since the sector’s advent, lenders have been quick to create bespoke products to cater to the ever-changing needs of consumers and create a high level of competition in the market. Lending criteria has been relaxed to allow for large mortgages on large property portfolios or a choice between products combining high fees and lower interest rates.
Similarly, booming house prices and cultural changes have also contributed to the industry’s success. Gardner says: “The broader economy and house price growth have also contributed to BTL’s success. Although on the surface higher house prices are not in landlords best interests, in actual fact they are because they prevent many people, especially first-time buyers (FTB), from getting on to the housing ladder and forcing them in to rented accommodation.”
CSUB
Cultural changes, including higher divorce rates, increased migration and the ongoing pensions crisis have also encouraged BTL market growth, explains Matt Grayson, head of PR at BM Solutions.
He says: “On average, BTL investors are 40-something professionals looking for an alternative investment to balance out the underperformance of the FTSE 100 and the pension climate. Similarly, more people are divorcing or moving to the UK to work for short periods, and looking for rented accommodation.”
Joining too late?
The continued popularity of the product and market opportunities available can easily be seen following the arrival of eight intermediary lenders into the BTL market this year, while several direct lenders, including Alliance & Leicester, have also decided to test the water by coming into the fray. But have they entered the race too late? Opinion is divided.
Grayson says there is no doubt the market is maturing, but stresses that while there is still demand for property, the market will not begin to decline for many years. The only bumps in the road, he says, could arise if the Financial Services Authority (FSA) decides to regulate the product. Similarly, forthcoming legislation surrounding houses in multiple occupancy (HMOs) could also rock the boat.
He says: “HMOs will only affect a small number of landlords, but the government is not being clear about who this piece of legislation will affect. ARLA has reported a high number of calls from concerned landlords about the impact HMOs will have on them. The government needs to be more lucid with its marketing.”
Red tape aside, the future of BTL looks promising. Sales are booming and are likely to continue to do for the foreseeable future.
“All the pointers show that the BTL market will continue to grow. The average age at which FTBs enter the housing market is increasing and properties in some desirable areas are affordable to many only if rented. These and other factors all point to a continuation of growth in the sector,” says Harper.
Gardner agrees: “BTL is still an attractive investment proposition. While so many people cannot afford to get on the housing ladder, rented accommodation remains their only viable option and demand shows no sign of abating.”
