Back in August the Council of Mortgage Lenders reported that buy-to-let lending set new records in the first half of last year, with lenders advancing 152,500 loans, worth 17.5bn. This represents a 17% increase in volume and 20% in value over the totals for the previous six months. Half-year results showed there were now 767,000 residential buy-to-let mortgages in the UK worth 83.9bn.
If recent research from Alliance & Leicester is anything to go by, buy-to-let lending should also have grown during the rest of 2006. The lender reported that since its launch into the sector six months ago applications have increased month on month, with a 37% jump in applications in November compared with October.
And Paragon published figures showing the cost of the average buy-to-let property has risen in value by 5% or 7,736 to 150,000 during the past 12 months, an increase of 0.8% during the previous 12-month period.
Recent research by Penrose Financial PR revealed that 84% of brokers think there will be a rise in buy-to-let lending in 2007. Paragon’s recent survey supports this. It is believed that while the market has contracted since the 2001-2002 boom, there is set to be substantial growth in 2007, largely due to a lack of consumer confidence in pensions and inward immigration.
Nigel Terrington, chief executive of Paragon, says that since less than 20% of immigrants become home owners within five years, this results in a net influx of people, particularly from Central and Eastern Europe, having a direct impact on the private rented sector.
Other factors contributing to the growth in the buy-to-let sector include: large City bonuses; stock market nervousness; job flexibility; enhanced higher education creating greater demand for student rental accommodation; and changing lifestyles. Meanwhile, the rental market has been boosted by the increase in young people wanting to rent because of the challenges associated with getting onto the housing ladder and the fact that individuals are staying single for longer.
Findings by BM Solutions that potentially one in four (26%) people in the UK live in rented housing and one in six (13%) renters do not want to own a house reinforces industry reports that this market sector is strong and is set to flourish further. The research is backed up by the common view that tenants rent because they are unable to buy – two thirds (67%) of respondents gave this answer. The findings also reveal that 12% choose to rent because they enjoy the flexibility it provides. A further 12% would rather rent in their ideal area than buy a property elsewhere. These are clear indications the rental market is not entirely driven by house prices and interest rate rises but is becoming a lifestyle choice.
This is good news for the broker wishing to capitalise on this opportunity. But while this sector of the market is not formally regulated, firms must still abide by the Financial Services Authority directive on treating customers fairly. The Alliance & Leicester survey revealed 70% of brokers thought buy-to-let mortgages should be regulated. The FSA states the reason why the market is not regulated is because landlords are seen as business developers rather than people who risk losing the roof over their heads if they fall into arrears.
This presents brokers with a problem as they have to adhere to TCF, while it is believed the profile of buy-to-let investors has changed to one of younger, ” There are real indications the rental market is not entirely driven by house prices and interest rate rises but is now becoming a lifestyle choice”inexperienced borrowers who might need more guidance than the traditional, professional investor.
Recent findings from Mortgage Trust revealed that of the small-scale and retail landlords who own three or less properties, 45% were either junior managers, small business owners, general non-manual workers or skilled manual workers. And in a survey by the National Landlords Association, 43% of landlords stated they had become landlords by chance while 21.3% said the property was one they already owned and decided to let rather than sell. A further 9.1% inherited the property and decided to let it rather then sell.
This makes it important for brokers to make sure their clients are aware that buy-to-let mortgages are a long-term investment and not simply a get-rich-quick scheme. Clearly it is vital for brokers to stay up-to-date with the UK buy-to-let market and with the sales potential in their area to ensure they can advise their clients.
While sourcing systems can indicate products available, distribution companies can also offer research and often have a great deal of experience of the market. This may include a knowledge of lenders’ products, types of property that are a good investment and key considerations when purchasing a property, such as the right price, proximity to transport links and shops, the condition and size of property and the potential to develop.
Intermediaries can also ensure they treat their customers fairly by using a distributor’s panel of buy-to-let providers, which can offer competitive rates and flexible criteria, with the opportunity to access exclusive products and services such as landlord insurance.
Brokers that have a relationship with distributors will also benefit from the support of a local business development manager, whose role is to work with intermediaries to support their business. BDMs can help brokers with little experience of the buy-to-let market develop the skills to open up these opportunities.
To get a feel for how much buy-to-let business intermediaries anticipated writing in last year, Pink Home Loans conducted a survey at the end of 2005. It found that 83% of respondents expected buy-to-let lending to be up to a quarter of their business, 15% expected levels of up to 26-50% and 2% thought more than half of their business would be in the buy-to-let market.
Brokers for whom buy-to-let is not an established part of their business should first contact their local letting agent. This will enable them to find out the kinds of properties that are in demand in their local area and how much rent an investor can expect from them. Advertising with letting agents in the local press will also help to raise a broker’s profile in the area. Where properties are already let or available to let, leaflet drops could be useful for generating new leads.
Brokers with an existing client database that includes buy-to-let investors should keep in contact with these clients to assist in the management of their portfolio and remortgaging properties when necessary. Some brokers also seek out buy-to-let opportunities on their clients’ behalf to help in portfolio development.
Paragon’s landlord survey of average investors suggests the number of portfolios will grow by 6% in the next 12 months and, with the prospect of further rate rises, the more first-time buyers struggle to get onto the housing ladder the stronger the rental market will become. Moreover, provided the investor has a contingency plan to deal with rental voids, buy-to-let lending represents a low risk to the provider and investor because rents should cover the mortgage payment.
But brokers who specialise in buy-to-let should be wary that they do not put all of their eggs in one basket. It would be wise to look to other opportunities to obtain business such as general insurance, secured loans or overseas mortgages. If developing their business seems too daunting with all of the products on offer, then distribution companies will be able to provide information and guidance on a range of business opportunities to ensure intermediaries remain in control of their busiMDness, buy-to-let boom or no buy-to-let boom.
David Copland is acting managing director of Pink Home Loans