The buy-to-let (BTL) market has been one of the fastest growing sectors of the wider mortgage market. Lenders and brokers have been growing in confidence in the sector. New lenders have entered the fray, while those already active have diversified their offerings. The market is diversifying, with near-prime BTL set to be the primary niche sector of the market for 2007. Ian Giles, director of marketing at Kensington Mortgages, admits that the BTL market is seeing a resurgence, with the market similar to that experienced following the market crash of the early 1990s. He explains: “The market has lots to do with confidence and BTL investors would have been looking at the 1993-94 property boom,” he says. “Although we are not in a market like that now, there are similarities for the property investor.”
Changing factors
Giles admits that changing social and economic factors have contributed to the rapid growth of the sector, with rising house prices, immigration and [missing text].
“There has been an obvious change in the psyche of people who want something in which to invest. Bricks and mortar are a lot more tangible. People now look at property as a way to generate and further incomes. Having said that, the market is still dominated by professional landlords and property investors, who view the market as a business. Because of this, the market is very professional, and even though it isn’t formally regulated, a great deal of the practices in place mirror the regulated markets.
“The Financial Services Authority (FSA) doesn’t regulate the BTL market, but I think it will be keeping a watching eye over the sector. Having said that, most of the lenders are established in the prime sector, so their actions are not likely to change just because they are operating in a market that is not regulated.”
With the market seeing massive growth, it is no surprise that mortgage lenders are taking a keener interest in it. With professional landlords and property investors dominating the market, lenders have realised the professionalism of the market and the importance of the good practices adopted in the sector. Despite some calls for regulation, Giles argues that, at the moment, there is no real need for regulation. “I can’t see a real need for the FSA to regulate the market. If it continues to grow in the same way as it has, then the regulator may take a closer look at it. It may also decide to regulate the market to help amateur landlords coming into the market, but at the moment I don’t see any real evidence of a need for regulation.”
A sophisicated market
Since its inception a decade ago, the BTL market has seen a multitude of changes, adopting many practices associated with the wider market. With many lenders having to diversify their approach, offering a variety of products in different sectors, it is no surprise that the BTL market has seen its only split, with non-conforming BTL set to be the main growth market. “BTL has become a more sophisticated market and lenders are taking a much more pragmatic approach,” Giles says.
With consumers continuing, albeit at a lesser rate, their ‘spend now, save later’ attitude, a greater number of people now have some form of financial glitch on their credit record, be it a CCJ, bankruptcy, or simply debt. With this in mind, it should come as no surprise that the BTL market has tried to recognise, and embrace it.
A number of experts have questioned the decision to offer a non-conforming BTL product. Although the regular market needs a non-conforming arm, some commentators believe that people with adverse credit should be restricted from entering the BTL market. Those against the evolution of a non-conforming BTL market have argued that it goes against responsible lending procedures, with much of the mortgage costs dictated by the amount of rent that can be obtained for each property.
A number of lenders have changed their rental yields, which, while allowing more people to enter the BTL market, also puts more pressure on the investor to meet rental requirements. Increasing the portfolio limit has also gone some way to enhance the BTL market, with some dropping the limit altogether. However, with adverse credit much easier to obtain, increasing limits and lowering demands to obtain a mortgage is not enough, as Giles explains. “There are more and more people experiencing some form of financial hardship, with CCJs rising in number. These are now issued for much smaller incidents. I have heard that there has been a rise in people getting them because of forgetting to pay the congestion charge. The near-prime market is going to grow over the next few years, and more lenders will be entering this market. They realise that the borrowing dynamics are changing and each case will have to be considered in its own right.”
Responsibility
Kensington Mortgages, in its own lending policy, takes into account the future earning potential of the investor and the property, as well as looking at their current financial position. The products currently in the market are also priced based on the level of risk, with Giles stating that those active in the market, be they investors, lenders or brokers ‘must be responsible’. He adds: “The average first-time buyer is now a lot older, and although the desire to get onto the property ladder is strong among most people, there is also the realisation that renting provides a viable alternative.”
With the market growing at a rapid pace, lenders have had to adapt their needs, be it in their product design, their portfolio limit or their approach to lending on rental yields. The market is now much more competitive, for lenders, intermediaries and borrowers, and some brokers have made the business decision to focus solely on the BTL market, offering solutions for high net worth clients keen to expand their property portfolios. Although some have claimed that there is a level of risk attached to it, Giles assessment that property provides a tangible asset is a very apt one. With a continued pensions crisis, the housing market is unlikely to see a major price crash, so provides a real benefit to keen property investors.
Giles states that the BTL market has been affected by the recent Bank of England Base Rate rises, with the change both helping and hindering the sector. He says:
A rise in interest rates is a double edged sword for those operating in the BTL market. Although it may mean that they will have to increase their rent, any increase will also impact on the aspiring first-time buyer market, forcing more people down the route of renting.”
It is clear that Kensington, and other lenders have enhanced their offerings to garner interest from intermediaries and borrowers keen to take advantage of the growing opportunities available in the sector. Although undoubtedly remaining a market of risk, this risk is now much smaller and negated by the principles adopted by lenders, taking many of their practices from the wider regulated market. The increased professionalism from those active in the market have also helped to eradicate many fears and the BTL looks certain to be another main market for 2007. It can no longer be considered a niche, BTL is a sector undoubtedly on the up.
