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The Buy-to-let season

While there are people who would like to clamp down on buy-to-let, a fertile investment scene beckons for experienced and adventurous borrowers


You would struggle to dream up a more fertile environment for the growth in buy-to-let mortgage demand – and the market is indeed blossoming. 

House prices are up, rental returns are rising, mortgage rates are attractive and savings rates are low. There is also a growing number of buy-to-let loans available. 

This has led to a flurry of activity, witnessed by the rising number of buy-to-let loans being approved, with more and more landlords looking to enjoy the fruits available. 

Yet that only tells one side of the story. Flowering buy-to-let sentiment has also partly been blamed for the failure of many first- time buyers to get a foot on the house ladder because it is said buy-to-let investors have flooded the market which has not only meant they snap up affordable houses but has pushed prices up too. 

While that point is up for debate, there is little disputing the rapid rise in buy-to-let interest. 

“Demand for buy-to-let remains strong and, if anything, has only got stronger as the year has progressed,” insists London & Country associate director of communications David Hollingworth.

“With poor returns on cash and tenant demand standing up well despite the increase in homebuyer numbers, the attraction of buy-to-let has not diminished.

“In fact, with house prices rising – rapidly in some areas – the appeal to investors has only strengthened. Although the income that a good buy-to-let investment could generate has been very attractive in recent years, the potential for more significant capital growth will only serve to bring more to the market.”

Council of Mortgage Lenders statistics show the market is growing, with lending up 5 per cent over the month to June to £2.2bn, although the number of loans approved was the same as May at 15,600, with the disparity most probably attributable to higher house prices.

Nevertheless, the CML points out that growth was strong compared with June last year – 38 per cent up by value and 23 per cent by number.

Buy-to-let lending in the second quarter of 2014 increased slightly on the previous three months but, more substantially, in comparison with the same period last year. 

Gross buy-to-let lending totalled 46,200 loans in the three months to June, up 1 per cent quarter-on-quarter but up 22 per cent on the second quarter of 2013. The loans totalled £6.3bn, up 3 per cent on the first quarter of 2014 and up 31 per cent on the second quarter of 2013.

Mark Harris, chief executive of SPF Private Clients, adds: “Over the past year our buy-to-let business has grown significantly, particularly on the remortgage front. 

“Landlords are looking to release equity. There are good yields and more capital growth.”

Rising house prices are what most buy-to-let investors dream of once they are on the ladder. And those dreams have become a reality over recent months.

While these provide a hurdle to buying a home, they also provide a massive opportunity to make cash from the booming market for homeowners. Prices across the UK are up 10.6 per cent over the year to the end of July, according to Nationwide Building Society.

Summer slowdown

However, there has been a slowdown this summer, with just a 0.1 per cent rise in July, the smallest increase since April last year. 

Perhaps a more significant statistic to landlords is the regional rises. In London, prices grew by more than 25 per cent in the year to June, with the outer South-east up 14 per cent. 

By contrast, Yorkshire and Humberside prices grew by just 7 per cent, and Scotland by 5.4 per cent. Nevertheless, and despite the slowdown, these are all rises, which all add to gains for investors. 

Looking ahead, Robert Gardner, Nationwide chief economist, predicts: “Over the longer term, the trajectory of house prices will remain crucially dependent on supply side developments. 

“While there have been some encouraging signs that construction activity is picking up, the pace of home building continues to run far below most estimates of what would be required to keep up with household formation in the years ahead.”

Of course, while prices are rising, landlords are buoyant. But the risks of getting buy-to-let wrong can be massive. Many got burned when house prices started to dip during the credit crunch, leaving many in negative equity. For those who could not afford their mortgage and therefore had to sell, this was a disaster. 

In some areas, prices completely crashed, particularly in urban areas with an over-supply of new builds, especially in the north of England. 

This all came after a massive push from many parties promoting what they considered to be the benefits of buy-to-let. Mainstream television programmes boasted of how every man and his dog could secure their retirement from property while adverts for buy-to-let “masterclasses” appeared all over classified advertising sections and on various forms of transport. 

House prices are key considerations for landlords but so too are rental yields. And they too have been rising although not to the same extent as house prices. 

LSL Property Service’s latest buy-to-let index shows rents have risen by just 2 per cent over the year, up from £738 a month in July 2013 to £753 in July this year.

LSL points out that the rise over the past year is only marginally higher than inflation, by 0.1 per cent while July was the first month in 14 that rents rose in real terms. 

Overall landlord returns are at 10.3 per cent which takes into account rent rises, house price rises and void periods between tenants, it adds. This is down on June’s figures of 11.3 per cent which was the highest level since June 2010. 

LSL’s analysis says the average landlord in England and Wales has seen a return, before any mortgage payments or other deductions, of £17,308 in the last 12 months. This is made up of rental income of £8,168 and an average capital gain of £9,140.

Looking ahead, if rental property prices continue to rise at the same pace as over the last three months, LSL predicts the average buy-to-let investor in England and Wales could expect to make a total annual return of 8.5 per cent over the next year, equivalent to £15,050 per property.

While every landlord wants to make as much money as possible as quickly as possible, some believe the market will be healthier with steadier growth.

Healthy relationship

David Newnes, director of estate agents Reeds Rains and Your Move, explains: “Steadier price growth is good news for landlords aiming to minimise volatility in the value of their properties while hoping for gradual and sustainable rises. 

“Most encouraging for landlords considering future investments will be the stability of rental yields over the last six months. The second half of 2013 saw yields dip back but so far this year we’ve witnessed an astounding consistency from gross yields.  

“This indicates a healthy relationship between property values and rental income – though landlords must always pay attention to the all-important local factors that lie beneath this average.”

As Newnes says, regional data is important, as it gives landlords a much clearer picture of what they will actually earn. LSL data shows rents in nine out of 10 regions are higher than a year ago. The fastest annual increase is in the South-east, where the average monthly rent is now 3.8 per cent higher than in July 2013. This is followed by a 3 per cent annual increase in the North-west and 2.3 per cent in London. The North-east is the only region where rents have dropped in the last year, falling 3.8 per cent.

Buy-to-let mortgage rates are also attractive at present and have fallen dramatically over the past few years, which makes funding a property investment easier – for those who qualify for a home loan. 

Data from analyst firm Moneyfacts shows that in August 2009 the typical two-year fixed buy-to-let mortgage rate was 6.01 per cent, falling to 5.58 per cent in August 2010, 4.08 per cent in August 2013 and 3.78 per cent in August this year. 

On a typical £150,000 interest-only mortgage, the fall between 2009 and today would see monthly costs on the average rates plummet from £750 to £470. 

“Buy-to-let market has entered into a price war of late, unlike the residential market,” explains Harris. “There are more buy-to-let products available although the greatest increase has been seen at more cautious levels such as 60 per cent or 65 per cent LTV.”

It is not just that the price of a buy-to-let mortgage has improved. The number of buy-to-let loans available has also grown dramatically. Moneyfacts reports there were 697 on offer in mid-August compared with 547 six months before and 460 a year before.

In some, quarters criteria is also being loosened. In July, specialist lender Precise Mortgages upped the maximum age from 75 to 85 that a buy-to-let borrower could be at the end of their term, as pension income is now allowable as the sole income source. 

It says: “The improvements are designed to help so called ‘silver landlords’ who are using rental properties as part of their retirement income planning”.

Alan Cleary, managing director of Precise Mortgages, adds: “The changes to the buy-to-let range effectively give us a retirement buy-to-let product designed to reflect changes made in the last Budget that allow pensioners more choice in how they plan for their retirement income.”

And those changes are important when looking at the market as the over-55s will have greater access to their pension pots which could mean they have more to spend on buy-to-let. From April, pension savers will have the option to gain immediate access to their whole pension at non-punitive rates from the age of 55.

At present, those with a defined contribution pension can take 25 per cent of their pension tax-free, then a certain amount (which varies by person) at their tax rate. Above that, they pay a whopping 55 per cent tax charge on the excess. 

From April, after the tax-free amount, any withdrawal is charged at their tax rate.

When you consider annuity rates are particularly unattractive at present, there is even more incentive for retirees to look at new avenues to fund their later life. 

This just adds to the impetus behind buy-to-let, as is the stagnant savings market which means people with cash are often looking beyond the haven of a traditional high street or internet savings account or cash Nisa to get what they consider to be a good return on their
nest eggs. 

Nest eggs

For years, savers have struggled to get a decent income on their cash so anyone who wants to see their nests eggs grow by a significant sum will need to look elsewhere – and take some risk. 

Gone are the days of earning 10 per cent on savings before tax – as was the case towards the end of the previous decade when some banks dished out such returns on specialist regular saver accounts. Even easy access deals paid up to 7 per cent back then. Now, the top easy access savings account struggles to break the 1.5 per cent mark.

While conditions are fertile for buy-to-let, the garden is not completely rosy, as some point out it is not always easy for wannabe investors to take their first steps on the landlord ladder because lenders are more cautious about lending to those without any experience.

Moneyfacts editor Sylvia Waycot explains: “Because first-time landlords do not have a proven track record for running a buy-to-let business, they pose a greater risk to the lender. Appetite for this risk is still lacking, which is borne out by the rise in the numbers of what would be attractive LTVs available to first-time landlords being restricted to borrowers with a previous buy-to-let history.    

“While the big high-street lenders have turned their backs on buy-to-let with 80 per cent LTVs, they have a large presence in the less risky 60 per cent LTVs, making it harder for other lenders to operate in this arena with competitive terms. History seems to be repeating itself, only this time rather than ignoring the residential first-time buyer market, it is the first-time landlord market that is being given the cold shoulder.”

While the buy-to-let market is buoyant, some have blamed it for preventing first-time buyers from taking their first steps on the property ladder given the demand for properties from investors is one of the contributing factors to the huge growth in house prices. 

Given the lack of regulation of buy-to-let, the market has been allowed to grow relatively unchecked which has led to some call for the Government to step in to take some of the steam out of the sector.  

Phil Rickards, head of BM Solutions, says the market is still on the radar of regulators and he says we may see an increase in calls for regulation over the coming months [see his comment, right].

Labour leader Ed Miliband wants a cap on rents, which could stifle demand for buy-to-let among investors although any such moves would be years away, especially considering his party is not in power. But many experts say the problem for first-time buyers is not buy-to-let  but more general housing policy which has seen a massive reduction in the number of homes built.

In the 2005/06 financial year, Government figures show the construction of 233,610 homes began, with a gradual decline in subsequent years. By 2012/13, this figure had dived to 125,460, yet many insist we need double that number to satisfy demand. 

On the flip side, preliminary data for 2013/14 suggests the number is finally creeping back up although most experts still demand many more home be built. 

The other big barrier for first-time buyers is the ability to qualify for a mortgage, made even more difficult by stricter criteria that has been implemented over the past few years ahead of the new tighter affordability rules that came into being in April following the Mortgage Market Review. 

Asked whether buy-to-let is responsible for pricing first-time buyers out of the market, Harris says: “Regulation, such as the MMR review, is
what may make it harder for first-time buyers to take the first step on the property ladder.”

David Whittaker, managing director of Mortgages for Business, adds: “Private landlords should not be blamed for successive governments’ spectacular failure to provide sufficient social housing and to ensure that enough new homes are built for would-be buyers. Bank rate at 0.5 per cent and quantitative easing has only really provided private landlords with an opportunity which has been grasped with both hands. If the current or next Government wishes to curb buy-to-let lending for the common good, it will have to start fixing the housing shortage instead of issuing bland rhetoric.”

For now, though, there is little regulatory barrier to buy-to-let.
House price growth may be slowing but few can see the day when the blossoming buy-to-let garden becomes a withering field any time soon.



The FCA has had some great success but must not stifle fragile growth 

Matthew Fleming-Duffy, broker, Cherry Mortgage & Finance company

The buy-to-let market remains buoyant and competitive for those individuals who have good deposits and an appetite to secure their own personal financial future. It also represents a fairly simple and stable investment strategy for many consumers, who may feel unsure about the stock market and the complexities of investing in pensions, Isas, investment trusts, open-ended investment companies and so on. 

On a personal level, my grandfather feels very let down by the broken promises of Equitable Life and the wider financial services industry as he saw his annuity tumble many years ago.

The Chancellor has even rewritten the rule book on pensions legislation in relation to the wickedly under-performing annuities market – perhaps an indication that he potentially would like to see direct property investment as an option made available to those able to cash in their pension funds to enable them to secure their income into retirement? And the buy-to-let market is formally classed as riskier than the residential mortgage market – hence the increased rates, fees and requirement for larger deposits.

But it is fundamentally less risky as banks can seek repossession in the event of default, assuming an assured shorthold tenancy agreement is in place. So why all the fuss? First-time buyers are facing the toughest challenges in obtaining a mortgage I have seen in 20 years in this industry. Property prices outside the M25 seem to be fairly static across most of the country.

With 40 per cent of property being purchased in London with cash (particularly by foreign investors), you have to question whether the current property growth is being fuelled by mortgage lending. Increased regulation is going to have a severe effect on lending volumes. HSBC has cited regulation as the single largest cause for its drop in profits.

We must not forget the root cause of the credit crunch was the lack of macro-regulation of banks. Lest we forget that Northern Rock had a small arrears book and the reason for its failure was cash-flow issues when the bond markets froze overnight. 

The Prudential Regulation Authority appears to be doing its job well as it makes progress with banking reform. The FCA has had some great successes. But it must be careful not to stifle fragile economic growth at a time when consumer confidence has only just returned. The buy-to-let market is about lenders and consumers accepting an element of risk and this should not be regulated into non-existence.




On the regulatory radar

Phil Rickards, Head of BM Solutions

While the buy-to-let market has been on an upwards trajectory over the past three to four years, an occasional glance back before that to the 2008/2009 market serves as a reality check to ensure that we continue to grow this part of the market in a sustainable way. 

The CML’s half-year completions figures at £12.4bn confirm what we had all hoped for and could quite easily be at least 20 per cent up on 2013 by the end of the year.

The positivity surrounding the buy-to-let market is also reflected among landlords as our latest Landlord Panel research conducted in conjunction with research consultancy BDRC revealed. We found that purchase behaviour in the three months to July remained stable, with only 5 per cent of landlords having reduced the number of properties in their portfolios.

Looking into the future, one in four are planning to increase their portfolio within the next year, indicating there is little to dampen their enthusiasm.

As with mainstream mortgages, buy-to-let lending is also stress-tested, albeit to different degrees. With a consensus that a rise in interest rates could be likely before the general election, landlords should be taking this opportunity to ensure they are well placed to withstand any rate rises.

Originally intended to regulate the rental sector, the EU Mortgage Credit Directory, which was published in February 2014, eventually included a voluntary opt-out for buy-to-let lenders following a period of lobbying the EU Parliament by the FCA. 

However, with the FCA expected to publish its own consultation paper in response to the EU Mortgage Credit Directive in September this year, it will be interesting to see what the details are and the potential effect it may have for landlords, tenants and the industry alike.

The recent Bank of England Financial Stability Report was a timely reminder that the buy-to-let market remains on the radar of regulators. As a result, we may start to see an increase in calls for regulation of buy-to-let as the issue of misuse within the sector is likely to stay on the agenda in the short term.

From a lenders’ perspective, we have done much to mitigate the risk of buy-to-let misuse by improving our controls. Last year, at BM Solutions, we introduced a specific let-to-buy scheme to clearly separate out a part of business that was historically difficult to identify. 

With greatly improved background checks I am confident that we are making the right moves to stamp out one of the challenges to this particular part of the market. The key for me here is that if both lender and broker keep working together I firmly believe that we can beat buy-to-let scheme abuse once and for all.



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