With the huge rise in buy-to-let in recent years, let-to-buy (LTB) almost seems to be the forgotten product in terms of column inches and consumer awareness. Yet, interestingly, LTB has never really gone away in terms of sales. There are no specific published market figures but anecdotally it’s fair to assume that LTB probably accounts for some 10 per cent of a niche lender’s total lending.
One possible explanation of why buy-to-let is a much more ‘fashionable’ concept than LTB is that the former was born at a time of soaring house prices and huge feelgood factor, whereas the latter was a product of one of the most depressed housing markets in living memory.
Mortgage professionals of a certain age will probably wince when they recall the situation that faced them at the beginning of the 1990s, with mortgage rates well into double figures, seas of ‘for sale’ signs and the term ‘negative equity’ entering the nation’s vocabulary for the first time.
get the daily news delivered to your inbox
This stagnation in the housing market had a bad knock-on effect on the country’s social and work mobility – people were prevented from moving to a larger home to accommodate a growing family, for example. Or they were unable to move to a different part of the country to follow a job offer because paying rent for new accommodation on top of the mortgage on an existing home they couldn’t sell wasn’t viable.
Here comes the cavalry
Into this dire situation rode the metaphorical cavalry in the form of a few specialist lenders armed with the revolutionary LTB product. Suddenly brokers found themselves on the front line of problem solving for those clients whose situations had seemed almost hopeless.
People could then escape from their particular trap with a mortgage on their new main residence, while the mortgage on their existing property was covered by rental income. Like all great ideas, it was very simple and it worked.
Not that LTB was a magic wand to solve everyone’s problems, of course. A LTB arrangement was, and still is fundamentally a business opportunity in that the client is becoming a landlord. For the product to work, there had to be a genuine rental market for that property type in that location so the person moving on could have a reasonable expectation of letting their soon-to-be vacant property.
download our news ticker
Now we fast-forward and pass through the mid-to-late 1990s, when the housing market was again buoyant thanks to more affordable interest rates and restored consumer confidence. By mid-2001, with interest rates touching a 40-year low, it was a case of lighting the blue touch paper and standing back. Average UK house prices have doubled in those few years.
Little surprise then that the negative equity busting LTB gradually fell from the limelight under a deluge of interest in buy-to-let. But the truth is that the earlier product is far from being a one-trick pony and now could be a great time for packagers and brokers to look again at the problem solving opportunities LTB offers.
It shouldn’t be forgotten either that today’s LTB product is more versatile than its ancestor in that the concept now has the added attraction of self-cert for those with complex income streams and also the possibility of flexible features. This is good news for investors coping with practicalities like refurbishing the rented property, or periods when it may be standing empty.
catch up on the industry buzz
Centre stage
The first key market factor that could bring LTB back to centre stage is rising interest rates. The latest hike in May is unlikely to be the last one for 2007. This upward trend will be felt particularly strongly by those whose fixed rate deals are coming to an end, bringing an unpleasant surprise as their mortgage reverts to their lender’s standard variable rate and their monthly mortgage repayments leap upwards.
It seems inevitable that the rising cost of borrowing will at least dampen growth across the housing market. In turn this could dent the consumer perception created over the past few years that property prices will continue to rise regardless of basic economics. Should the market slow down or even see falling prices then people will tend to hold back on their purchases – with chains the inevitable result.
find out more about this weeks industry news
That, of course, is where packagers, intermediaries and estate agents should consider LTB as a serious chain-busting tool – doing just what it was conceived to do, albeit now in far more benign circumstances.
The chain-breaking capability could become even more important towards the end of the decade when the Land Registry introduces its Chain Matrix system which will make an individual chain transparent to all parties, highlighting where properties are sticking.
Only the beginning
While buy-to-let is the current consumer investment vehicle of choice, LTB has attractive benefits for clients who are looking to move up the property ladder.
“We find that many clients are simply unaware that the LTB option exists,” says Phil Burke of Specialist Mortgage Funding. “The perceived risk of letting out the property you’re leaving is often seen to be lower than going the buy-to-let route, and that appeals to people who would welcome the investment but don’t see themselves as professional landlords. An added incentive for LTB is that generally speaking we can secure a slightly higher LTV than on a buy-to-let, so deposits on subsequent properties can be low.”
“One LTB option is called staircasing,” explains Simon Nicholson of Creative Mortgage Solutions. “A broker’s client takes out a mortgage on the property they are moving up to and lets out their existing property, so effectively the tenant covers the cost of that mortgage. When the time is right, the landlord moves up again using the same type of deal and then they have two tenants paying their mortgages on their two previous properties. Provided they buy each new property with a view to its future letting potential then they can continue to staircase and start to build a large property portfolio in their wake.”
find the latest house prices
Some will use the staircase effect to boost their retirement income, while a growing band of investors are using LTB to grow a portfolio of properties for a different reason, as Burke explains: “It’s clear that the first-time buyer problem isn’t going away for the foreseeable future. If the market isn’t finding solutions then parents are taking the situation into their own hands and creating what is effectively a private stock of homes for their offspring.”
That means instead of still living in the parental home into their early 30s, young people can move out into these other homes earlier and take over the mortgage which could - if their parents bought the property some time ago – be a lot smaller than if they were buying a similar property in the normal way. Effectively the rental income has subsidised a ‘cheap’ mortgage for the first-time buyer. If the rented-out property reverts to the young person’s main residence after more than three years as an investment, it will probably be subject to capital gains tax, so any client considering this arrangement should seek appropriate advice first.
Emerging roles
Another interesting solution for a similar issue is for empty nesters who have a large family home to rent out using LTB. They then downsize again, but there will be capital gains implications if the family home is rented out for more than three years.
Yet another emerging role for LTB is as part of a so-called ‘double deal’. In this scenario, a client remortgages their original property with buy-to-let and purchases their new main residence with LTB, both with the same lender. This is good news for the lender because they sell two mortgages instead of one, and, of course, the broker gets two lots of commission.
It is testimony to the fundamental ‘rightness’ of the LTB product that it is as much, if not more of a problem solver for your clients now than it was nearly 15 years ago. In fact, if the LTB concept didn’t exist, now would probably be the perfect time to invent it.
register for the next forum
