Numerous sectors of the mortgage market offer great potential, but none have realised it and blossomed so fully as the buy-to-let market in the last decade. This year is already set to be another record-breaking one for the market and distribution strategy will be key to the success of lenders in this sector.
A look at industry figures from the Council of Mortgage Lenders gives some idea of the momentum generated by the buy-to-let market in recent years. At the end of 1998 there were 28,700 buy-to-let mortgages outstanding in the UK. By the end of 2005 loan numbers had leapt to 701,900 and were worth 73bn.
This type of growth is remarkable, and both investors and lenders are right to be careful as to future prospects and the possibility of a downturn. However, in looking at the factors underpinning the market and examining the reasons why it has been able to grow and mature so quickly, there seems little to be immediately concerned about.
The explosion that has taken place in the market since the late 1990s owes much to developments 10 years earlier. The 1988 Housing Act changed the relationship between landlord and tenant and although not perfect it created a framework which gave the complete right of possession to landlords at the end of a tenancy.
The Association of Residential Letting Agents then introduced a scheme in collaboration with a number of lenders, which moved away from the 50% deposits and commercial rates that had been levied in the past and towards pricing in some of the specialist sectors. That pricing has continued to sharpen until rates are not far from mainstream levels and are certainly as competitive as they have ever been.
While changing legislation and industry collaboration helped create opportunities in the buy-to-let market, there have also been numerous other factors that have played an important role. The changing social and demographic structure of the UK has seen a rise in people living alone. Student numbers have climbed dramatically while the number of long-term relationships breaking up is rising. Immigration has rocketed too.
Increasing numbers of single-parent families are looking for accommodation, while first-time buyers struggle to meet the rises in house prices and are being forced into rented housing for longer than ever before.
It is unlikely that any of these factors will change significantly in the coming years, so the demand for flexible accommodation will remain high. This is set against a backdrop of a housing market without enough properties to meet demand. While this climate continues, there will be a need for rented housing and landlords are best placed to meet that demand and benefit.
The only possible glitches that have been cited as having potential to affect the markets ongoing development are increasing legislation and capital values outstripping rental income, making it increasingly difficult to satisfy the yield required by most lenders.
The introduction of legislation for houses in multiple occupation in England last year should not prove as problematic as some have forecast. HMO legislation has been in place in Scotland since 2000 and there has been no overt negative impact on the buy-to-let market north of the border and none is expected in England.
Indeed, there is every likelihood that HMO legislation will focus landlords minds on their decision to rent in this sector and while some may exit the market there will be others who decide to increase their portfolios and concentrate in this area as true specialists.
Meanwhile, those with concerns about rental yields deteriorating because of ever-increasing property values should look at some of the new mortgage products being brought to the market. Rather than relying on calculations relating to rental income, they revolve around affordability and are moving, like in the mainstream residential market, to more sophisticated ratings of a borrowers actual ability to pay.
The growth in the buy-to-let market has been delivered by an increasing number of lenders who have sought to extend their lending portfolios and take advantage of a quickly developing market. This increase in lenders has not only helped give confidence to investors, but also meant product innovation has been pushed along by high levels of competition.
However, there are still many opportunities for new lenders in the buy-to-let market. To date most of the movement on products has been around the rate charged and the loan-to-value required but there is also now a move to affordability products, which is only in its infancy and offers new players an area to investigate.
There is also a large number of mainstream residential lenders which are either looking to extend their involvement in the buy-to-let market or enter it for the first time. Here there are also opportunities such as possibly combining residential and buy-to-let products or looking at mortgages for more than one investor where a number of people might want to act together.
Buy-to-let for overseas properties remains popular and the growth of the European Union will bring opportunities for those prepared to look at new markets. How lenders deliver the needs of their clients and best advantage for their own risk portfolios remains to be seen, but there is no lack of opportunity.
In delivering products successfully into the buy-to-let market, distribution will be vital. The success of those already in the market will depend on growing the relationships they have with brokers. This will largely be driven by their ability to strengthen the partnerships and working relationships they have with packagers.
For newcomers, the challenge will be to grasp the numerous opportunities to offer something new, but also to engage the packaging industry effectively to generate the kind of instant volumes needed to deliver the returns that lenders entering this market are seeking.
For mainstream lenders looking at buy-to-let for the first time, simply trying to grow a buy-to-let book of business through their existing distribution channels is going to be difficult, as for many of their intermediaries this will not be a specialist area. The key will be to work with proven specialists that deal in large volumes in this arena and make sure the proposition they have offers something new to the market.
Increasingly, collaboration between lenders, packagers and brokers will see applications being handed between parties with the minimum of friction and no need to re-key data. There is still a way to go before the back office systems of the various parties involved operate effectively together and those that push forward this sort of working relationship the quickest will prosper.
By improving technology and developing their relationships with distributors, lenders in the buy-to-let market should still be able to reduce costs and improve efficiencies, making it easier to handle larger volumes of business and still make the margins they need.
The next 10 years are unlikely to see the same growth in the buy-to-let market as in the previous decade, but there is still huge scope. With demand set to remain strong for rented accommodation, the challenge will be to supply products that meet the changing needs of the investors and to make sure distribution lines are clear and free flowing.
Nigel Payne is managing director of The Mortgage Business