Buy-to-let (BTL) is in fine fettle. But, these are not the easiest times for BTL landlords. Recently, they have been demonised for blocking opportunities for first-time buyers (FTBs). Then lenders have been accused of becoming too lax in their criteria and that borrowers could be unable to maintain their mortgage payments.
Any successful sector will attract critics – but at least far fewer are saying – as they were a few years ago – that the BTL bubble is about to burst.
Certainly, I do not believe BTL has peaked, although it may tread water for some months until it is clearer where interest rates are headed.
Impressive growth
Overall this is a market worth an impressive £94.8 billion according to the Council of Mortgage Lenders (CML). Last year it also grew some 48 per cent in volume and 57 per cent in value over 2005.
At a CML seminar on the future of the BTL market in May, Jim Cunningham, the trade body’s senior economist, said ‘significant further growth’ was expected but that the sector would be ‘marking time’ in the short term because of rising interest rates squeezing rental cash flow.
He said this may put off novice newcomers, but that professional landlords would keep adding to their portfolios and that as the market improved, stronger rental growth would support further investment.
Meanwhile, are lenders risking destabilising the market through being too generous in their criteria?
There is no doubt that there is greater flexibility and easier terms than say five years ago, or 10 when the market was in its infancy. The average loan-to-value is 85 per cent while lenders on average are looking for rental income to exceed mortgage repayments by 25 per cent. Only recently these figures have stood at 80 per cent and 30 per cent respectively and they are set to fall further as competition tightens in the coming months and years.
There are also sweeteners in the form of free valuations and legal expenses – but allowing BTL mortgages to become accessible as prices go up and rents have steadied or dipped is not likely to brew up future problems. Whether 100 per cent BTL mortgages are such as good idea is another matter.
There are some investors who are able to hand over all their rental income in mortgage payments and indeed who will benefit from long-term capital growth or who can perhaps increase the rent at a later date or if the property is improved. But, there is no doubt that unless there are funds put aside to cover void periods and repairs and maintenance then arrears can quickly develop.
BTL lenders have, to date, a creditable reputation. We need to keep it this way.
Looking ahead
Meanwhile, there have been signs that arrears are rising, although this is not presently causing excessive concern. If we look at the combined CML figures for both repossessions and where there is a court appointed receiver of rent, then this is still only 0.2 per cent of all BTL loans.
The fact there has been innovation of the basic product and that affordability has improved is good news. It looks likely that more lenders in the sector are going to bring their rental assessments down to 110 per cent. This is going to be riskier – but underwriters need to exercise caution, turn business away if necessary and manage arrears efficiently. Some lenders are offering a more competitive deal to those landlords who already have experience – and equity in other properties. This may be a prudent move while the interest rate uncertainly continues.
Part of a bigger problem
I would not agree that BTL investors are wrecking the chances of FTBs to enter the market. This is a much bigger problem and linked to a general shortage of homes and the fact that salaries have largely not kept pace with house prices. You are also always going to have some people who want to rent rather than buy because they are only working for a short time in a particular location or are studying, for example.
Some have argued that the tax relief offered to landlords should be abolished and that this could benefit FTBs.
This could be an unwise move. More landlords is positive for tenants and should mean properties of better quality and more rent competition.
We frequently hear that there is a pensions crisis and that many have failed to put aside enough – there are many who do not have access to a company pension or who are self-employed. Owning another property should be permissible as an alternative to traditional pension funds and indeed has been shown to outperform these. Penalising such people and making it less attractive to invest is not going to be helpful.
Concerns have also been expressed about the trend of BTL landlords buying properties off-plan – which may mean problems when it comes to renting if there is oversupply. Again, this is something lenders need to be wary of and ensure that the landlord is aware of the risks.
There was even a article saying BTL landlords have taken over entire streets, with tales of properties being overcrowded and falling into ruin.
Bad landlords have existed since the days of Peter Rachman and before, but there are many who act responsibly and have satisfied tenants. We all want to see high standards in the market – and that includes lenders assessing the risks and borrowers fulfilling their side of the bargain.
