The buy-to-let boom is back as lenders return
The competition for rented property is heating up, which is boosting the fortunes of landlords
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Louise Thomas
Editor
One person's misfortune is often another's opportunity: this is perhaps truest in the property market.
Since the crash of 2007-08, millions have been thwarted in their efforts to buy their first homes. A mortgage tap which was flowing at a heady rate was abruptly turned off and has only of late started to flow at a much reduced level. But fewer first-time buyers means more competition for rental properties – particularly in the overcrowded London and the South-east, but now more recently the once moribund northern cities. Rents are rising at close to double digits in many parts and this has brought back the buy-to-let investor. "Undoubtedly, we are seeing the first-time buyer being augmented and indeed supplanted by the buy-to-let investor. This is reflected in the number of providers that have re-entered the market of late," said Ray Boulger, technical director at broker Charcol.
Financial information service Moneyfacts says that a year ago there were 295 buy-to-let mortgages available. Today the figure is 481. In fact, there are more buy-to-let mortgages available than at any time since the summer of 2008, before the world financial crisis went into overdrive.
"There are definitely more lenders who are back in the market. Skipton stopped any buy-to-let and came back within the past couple of months offering quite good rates," said David Hollingworth from broker London & Country. "Paragon, a specialist lender in the sector, came back at the end of last year. They had been associated with a professional landlord but have launched mortgages which are geared more to ordinary people entering buy-to-let for the first time."
Ian Andrew, head of intermediary sales at Mortgage Works, Nationwide's buy-to-let arm, echoes this point. "For a couple of years there was very little competition between lenders. You had us and Lloyds, to be frank, but this has now changed. You have seen other providers entering the market again," he said.
It seems that the buy-to-let market is opening to homeowners investing through a second or third home, as well as professional landlords. But is this the mid-2000s all over again when you had buy-to-let property millionaires who actually just owned a pile of mortgage debt?
"I think things are very different this time round," said Jeremy Law, head of buy-to-let at the Yorkshire Building Society. "The key is that buy-to-let is a business. At the height of the market boom we had lots of institutions lending to people who frankly didn't treat buy-to-let as a business. They were, in effect, speculators and lenders went along with that," Mr Law added. "There was also some notable fraud cases. Now, though, the parameters have changed for lending and most applicants see this as a business."
With bumper rental yields on offer it is easy to see why. "The market is very strong right now due to demand for rentals. We have couples splitting where one household turns into two; we have migrant workers, people moving around the country for work, students and of course frustrated would-be first-time buyers in their droves. The demand is more acute than ever and this is reflected in rents," Mr Law said. The new economics partly explains the Yorkshire Building Society's decision to enter the buy-to-let market for the first time, despite the fact, that at the time of its merger with the Chelsea building society, there was believed to be £41m bill for buy-to-let mortgage fraud.
Even the phenomenon of the "buy-to-let millionaires" who seemed to have desperately over committed themselves hasn't led to the shake-out that was widely predicted. "It's interesting that lenders such as Bradford & Bingley (now Northern Rock) which were presumed to have had a poor buy-to-let lending book haven't seen anywhere near the level of defaults that so many thought they would see," said Mr Hollingworth. "The increase in demand for rents has managed to come to the rescue of many of these seemingly overstretched buy-to-let borrowers, as has the continued low interest rates."
However, mortgage deals are not anywhere near as easy to get hold of as they were three or four years ago. Mr Law explains: "When we enter the market it's not just about whether or not the borrower can afford the loan. It's about whether or not the property itself is rentable. We will be employing specialist valuers who will be able to decide whether or not the property is in the right location for renting or not. This more focused approach should hopefully be good for the borrower and for us as the lender."
Nevertheless, people getting into buy-to-let normally have to jump through certain hoops. "In 2007 we had loan to values (LTV) on buy-to-let mortgages of 90 per cent. You can't get anywhere near that today," said Mr Hollingworth. Now most lenders insist on a minimum 30 or 35 per cent deposit and the rental income from the property being a minimum 1.25 times the mortgage costs.
But according to Mr Andrew, some of these supposed red lines are becoming a bit blurred. "We made the decision to move to 80 per cent LTV a couple of months ago and feel very comfortable with the quality of those applying. We have plenty of professional landlords applying but also some new people who want an alternative to poor savings rates and low investment returns," Mr Andrew said.
However, one thing that has definitely got worse for borrowers are the upfront fees. "Some charge a flat rate but others can be as high as 3 or even 3.5 per cent of the mortgage value. On a £300,000 loan that equates to about £10,000 in fees. Some lenders are artificially keeping their rates low to pull in the punters but getting the money back and more on the fees," Mr Hollingworth said.
Expert View
Jeremy Law, Yorkshire Building Society
The buy-to-let market is very strong at the moment mainly because all the economic indicators are pushing up rents and yields for investors and mortgages are becoming more available. However, it is important to approach any buy-to-let investment as a professional. Location is crucial, as is identifying a local market, and factor in periods when the property may not be let and therefore not earning.
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