The buy-to-let sector has seen substantial change since its rise began in the late 1990s, with tailored mortgages for the sector now available to a wider range of landlords and on more accessible terms.
When buy-to-let mortgages first appeared, the market was dominated by professional landlords who were more often than not borrowers with large portfolios of properties which they used as their main source of income. In more recent years, we have seen the emergence of new types of landlords.
With other financial sectors not meeting savers’ expectations – think unit-linked investments not achieving expected returns coupled with the closure of most employer final salary pension schemes, forcing people to opt for less rewarding defined contribution offerings – investors have looked at the housing market in a new light.
And with property values showing a steady increase over time and the added advantage of being able to tenant a property – thus in effect having someone else funding the mortgage – people are taking advantage of the benefits of buy-to-let.
There has been a notable rise in the number of first-time landlords entering the buy-to-let market. Of course, some are looking to replicate a flexible pension scheme whereby they are not restricted to buying an annuity at the end of the term or a date at which they can take their investment monies. Others are simply looking to invest in a stable market which gives good returns.
But as well as professional landlords and smaller investors, other new landlords are starting to appear. Many people leaving Britain in search of sunnier climes are investing in UK property because they like the security of having it to fall back on should they decide to return.
Buy-to-let is ideal for these people. Not only is their mortgage covered by a tenant’s rent (assuming they are successful in getting a tenant), their property is also being looked after in their absence. And should these landlords ever wish to come back to the UK, not only do they have a property to live in but they also still have a good credit history.
Unsurprisingly, first-time buyers are also venturing into the buy-to-let arena. With incomes too stretched for them to afford to take out their own residential mortgages, some first-time buyers are using buy-to-let mortgages to get a foot on the property ladder.
Lenders’ acceptance of first-timers highlights how they have changed with the times, bringing easier access to the buy-to-let market. In recent years, lenders have not only become more open to a variety of applicants but have also moved their criteria requirements to mirror this.
Many lenders will now accept first-time buyers and some will lend to applicants as young as 18. Many have no upper age limits. This has enabled applicants from all age brackets to find lenders that will accept them.
We have also seen the introduction of 90% buy-to-let mortgages. These have allowed applicants to get into the market with lower deposits. They also allow existing borrowers to remortgage to higher levels, giving them larger deposits to put down on second properties.
Rental calculations have also been reduced in recent months. Whereas the calculations six months ago were up to 130%, more lenders are now using up to 110%. This again gives applicants the ability to borrow higher amounts.
But the introduction of 100% calculations has left some confused because in many cases mortgage payments exceed the achievable rental. Nevertheless, applicants who are using properties to fund their retirement are happy to contribute to the mortgage in the short term to reap the longer term benefits.
The effect of some lenders making their criteria easier to adhere to has been that others have followed suit, creating a competitive marketplace. This is surely good for landlords. With strong competition and more lenders venturing into the market, product choice can only become better.
The line between commercial and buy-to-let mortgages is becoming more blurred. Many properties which 10 years ago would have only been available with commercial mortgages are today being taken on by lenders as buy-to-let propositions.
For example, lenders would not have considered properties situated over commercial premises when buy-to-let mortgages first became available.
But a property’s location in relation to other commercial property is becoming less relevant, provided there is no commercial element in the buy-to-let property itself.
So what about the sceptics’ argument which insists that the increasing saturation of the buy-to-let market will create difficulties for would-be landlords?
You only have to consider the country’s growing population to refute that argument. The age of the average first-time buyer has risen from the mid-20s to early 30s. Non-home owners in their 20s rely on rented accommodation in the years before they can afford to get on the housing ladder.
There is also a growing student population relying on rented accommodation. Groups of students often look to rent large houses between them which for a landlord often creates a high rental yield, highlighting a potentially highly profitable section of the buy-to-let market.
But be warned. As well as bringing high rental yields, houses in multiple occupation can also bring more work for landlords.
Many lenders have pulled out of the HMO market since the government started regulating it last April. Lenders that accept HMOs have differing views on the regulations, as do many local government departments, and it is imperative that every case is looked at in detail to see which lender’s criteria each case fits.
Needless to say, the setting up of a mortgage with an HMO licence needs a higher level of management with regard to renting the property out, which means it is perhaps an area of the market that is best reserved for experienced landlords.
Another recent change in the law affecting buy-to-let is in relation to tenants on benefits. Where previously rent could be paid either to the tenant or directly to the landlord, it now has to be paid to the tenant.
This has caused some concern among landlords worried about collecting rent, although from a lender’s point of view the new rules are more favourable.
As there is no longer a third party tenancy agreement, lenders have more control over properties should repossession be required. Therefore, the change may encourage more lenders to venture into the buy-to-let area.
Meanwhile, there is growing interest in the regulated buy-to-let mortgage arena, particularly among applicants looking to buy property for children or elderly parents to live in.
When a property is to be tenanted by a family member it automatically becomes a regulated buy-to-let property. This reduces the number of lenders that will look at the case since it must be treated as fully regulated. But these cases can complete as easily as non-regulated buy-to-let cases provided they are accepted by lenders that deal with regulated cases.
The upside is that landlords have the security of having family members in their property.
Calls for buy-to-let deals to be regulated are periodically heard but the government does not seem to think this would be of benefit. It has confirmed that buy-to-let mortgages are seen as commercial deals and is unlikely to enforce regulation any time soon.
So with buy-to-let a non-regulated area of the market and becoming easier to get into, the percentage of these mortgages being taken out is rising and will continue to do so.
And as a further retort to buy-to-let sceptics, while there may be an influx of landlords to the market there is also an ongoing housing shortage. With Britain set to increase its population as more countries join the European Union, demand for housing is growing.
Buy-to-let mortgages have boomed in recent years and this has changed the marketplace considerably, leading to a rise in the number of lenders offering buy-to-let mortgages and a wider spread of types of landlords.
With property still being a sound investment, it looks as though buy-to-let has a bright future.