Paul Hunt, Head of Marketing, Platform
The buy-to-let (BTL) market has matured incredibly quickly in recent years as the number of borrowers has soared. To get some idea of the huge leaps that have been made, one only needs to look at industry figures from the Council of Mortgage Lenders (CML). In 1999, there were 9,100 BTL mortgages outstanding. During that year, 44,400 gross advances were made, totalling £3.1bn in value. Fast forward six years and the landscape has changed dramatically. At the end of 2005 there were 701,900 mortgages outstanding and 223,800 gross advances had been made during the year, to a total of £24.5bn. The market now accounts for somewhere in the region of 10 per cent of all UK mortgage lending and has attracted lenders and borrowers from across the spectrum. No longer is it the preserve of specialist providers and investors, but it is a mainstream option that consumers have flocked to in their thousands.
Welcome competition
This competition is welcome and has forced margins to fall and rates to close in on the mainstream market. It has also seen loan-to-values (LTVs) rise and the requirements on rental yields ease. In a market where underlying capital prices continue to rise, there has been huge demand for such moves. Last year was the first time, according to the CML, that average rental yields had fallen below 130 per cent and they now sit at 127 per cent. Given the number of lenders that work off a figure of 125 per cent, it is reasonable to expect this to fall further.
How far these will fall remains to be seen, but unless the brakes really do begin to bite on the capital gains that are being made in property values, then it is unlikely rents will be able to keep up. House prices have slowed in recent years but only to take off again and it seems likely this spurting pattern of growth will continue. It may be a case that lenders seek rental void insurances to be in place to offer lower yields or that landlords are forced to seek properties at the lower end of the market to keep their mortgages low. It may also be a case that landlords themselves simply have to mix their portfolios more effectively to ensure they can keep ratios on an equilibrium across their portfolio. What is certain is that development, and plenty of it is on the way.
Criteria changes
Certainly demand remains high for a shift in the amount providers will lend. Similarly average loan-to-values (LTVs) moved beyond 80 per cent for the first time and now sit at 83 per cent. However given the range of products and providers offering higher LTVs, it is again expected there will be further movement on this. There is no problem with the criteria changing and any market that is not capable of meeting the needs of its clients and adapting to a changing commercial landscape is not long for this world. However in their eagerness to maintain market share, lenders must be equally careful in maintaining the quality of their lending books and ensure their risk profiles do not alter dramatically or indeed dangerously.
Given that most BTL landlords are in the market for the long-term, there is an argument to suggest that 83 per cent is still a low LTV to be working from and there is leeway for manoeuvre. It is also possible that lenders will again look to modify the products they are offering and provide better LTVs to those prepared to tie themselves into long-term fixed rate products. Certainly the influx of new lenders to the BTL sector will see different answers being offered to these existing problems and as new players go after particular sections of the market then they will tailor specific products for the challenges their borrowers face. Whether this will see lenders looking for a share of rental profits or perhaps a slice of the capital gain after a certain period of time is hard to say, but there will doubtless be innovations brought to bear.
Light adverse
One area of real change in the BTL market has been at the light adverse end of the product range. As with mainstream mortgages, which have seen huge development in this area, products are increasingly available for those with credit issues and the diversification into catering for this type of borrower is a clear indication of the market’s maturity. Certainly brokers and borrowers can expect to see more in the way of innovation for near prime BTL products as lenders continue to cater for borrowers. The BTL market is perhaps one of the most exciting and fast moving sectors of the mortgage world and with growing demand for rental properties and no shortage of willing investors, it remains set to stay so for the foreseeable future.
