‘Buy-to-let has been the success story of the last decade.’ A sweeping statement it may be but most people involved in the property market would agree with it and the signs are there to say this sector will continue to provide brokers with plenty of business over the next few months. The continued escalation in property prices, maintained levels of immigration and further moves away by younger people from buying their own home are all expected to keep demand healthy for rental property.
This has especially been the message coming loud and clear from those within the sector, with lenders and brokers predicting record levels of business this year to eclipse the previous landmarks set in 2006. As Gus Park, head of buy-to-let at Mortgage Express, laments:
“There is every reason 2007 can be as strong as 2006. There is still huge room for growth and our last landlord survey showed confidence among landlords was higher than ever.”
However, while 2006 can be marked down as a successful one for the sector, the new year brings with it new challenges which it will have to meet. For Jonathan Burridge, managing director of Quantum Mortgage Brokers, much now depends on the lenders:
“2007 will be a very interesting year for buy-to-let (BTL). To sustain the business volumes of the last two years will be dependent on lender innovation. Interest rates have risen but yields have not increased at the same rate. Property prices are also up but we have reached the top of the curve using the current approach to the market so something has to change.”
But what more can lenders do to challenge the boundaries while at the same time ensure they maintain the principles of responsible lending? For Matthew Wyles, group development director at Portman Building Society, the fact there are now so many lenders in the sector means market forces are already pushing lenders in new directions.
“There are many things lenders can do in terms of loan-to-value (LTV), rental income tests, maximum loan sizes, etc, but broadly speaking the market is on the retreat across the board. Frankly, there are too much lenders chasing a finite amount of demand from landlords. This has one inevitable consequence - the depression of prices and the relaxing of criteria.”
But it’s not just in the area of criteria which lenders are looking at. BTL offset looks set to emerge more in 2007 and Leeds Building Society has already launched a BTL offset just before Christmas. Brian Ewing, head of intermediary sales at Intelligent Finance, believes the two products combine well:
“Both BTL and offset are two growing markets and bringing them together is a tax efficient way of putting a BTL together. Lenders will look at it and while it is not on our radar at the minute, I’d never say never.”
For Park, he believes more lenders are realising the BTL market isn’t as risky as they once thought and they are now looking at different ways of helping landlords, especially those with larger portfolios.
“BTL offset is one thing but landlords with multiple properties need to have money to move quickly. We have seen a lot of criteria innovation last year but now we will see more innovation for portfolio landlords. They have specific needs and we can and should do more to help them.”
However, one contentious area which is expected to be explored more this year is non-conforming BTL. Some lenders have dabbled in the adverse arena and Wyles admits it is something Portman are looking at more closely.
“There is already a market for adverse BTL and while we’ve been doing small volumes already, we’re really ramping it up with the launch of an adverse proposition this month. BTL adverse is interesting though as it is more dependent on the ‘letability’ of the property so we feel there is less risk than normal owner-occupied.”
However, Park believes lenders have to be very careful when taking on adverse business and clients who take this route will be at a disadvantage:
“There are good and bad risks to it. There are some out there who are reasonable landlords who’ve just had a few things go wrong in the past. These would be decent risks but there are also those who are non-conforming for a reason and the challenge for the lender is to distinguish between the two. Also, for extra risk you would have to charge more so you cause problems for the landlord with rental cover and this puts them at a disadvantage with prime landlords.”
Despite the indifference over adverse BTL, most within the market agree that Houses in Multiple Occupation (HMOs) will be the big growth area in 2007.
Burridge states: “The strongest opportunity for landlords this year will be HMOs. Very few lenders have fully embraced them and it has extremely strong yields with multiple tenants so more lenders coming into the market will be welcome.”
Park concurs: “In terms of HMOs, it was all doom and gloom last year but it will rebound this year. There is plenty of demand and you get some good yields because of the multiple tenants. If you get through the initial costs and get a licence then it’s a good market to be in.”
So while there are challenges to be met, it seems that there is a good environment for landlords out there to work in and lenders are looking at ways to maintain the current buoyancy in BTL. Portfolio landlords look set to reap the most rewards as they will be able to combine their experience of the market with an emphasis from lenders to make their lives simpler. Whether the market goes up, down or stays the same, buy-to-let looks set for another wild ride in 2007.
