Sally Laker, managing director, Mortgage Intelligence
This year marks the 10th anniversary of the introduction of buy-to-let mortgages. Those who bought properties 10 years ago are likely to have seen stellar returns on their investment - the average house price has risen from just over 66,000 to nearly 180,000. Launched by the Association of Residential Letting Agents, the first buy-to-let loan in this country was sold through Bradford & Bingley in July 1996. Since then the market has boomed to such an extent that buy-to-let lending now accounts for around 14% of the mortgage market, according to Paragon Mortgages. The fastest growth has come in the past few years, despite a sharp slowdown in house price inflation. The Council of Mortgage Lenders reports that at the end of 2005 there were 701,900 buy-to-let mortgages outstanding, up 33% as compared with the previous year. The relaxation of lending criteria on buy-to-let mortgages has played a large part in the market surge. Buy-to-let loans can now be had at similar rates to standard residential mortgages. The amount of deposit required to take out such mortgages has also fallen over the years. According to the Council of Mortgage Lenders, at the start of 2000 most buy-to-let lenders would only allow potential landlords to borrow up to 75% of a property’s value. By the end of last year, that had increased to 85% and some lenders will now offer up to 90%. I support going to 90% as the arrears ratio on buy-to-let is low, and although Paragon does not do 90%, its arrears ratio is just 0.08%. Meanwhile, rental cover has been lowered. Borrowers at one point had to be able to command rents as high as 150% of mortgage interest payments. Nowadays, some lenders are willing to go as low as 100%. But as more and more investors jump on the buy-to-let bandwagon, tenants have an increasing number of properties to choose from. This makes it difficult to raise rents. But the recovery seen in the housing market in recent months has also served to turn frustrated first-time buyers back to the rental sector and landlords remain positive about their prospects for the future. According to ARLA, 62% of landlords want to buy a further property in the next 12 months and 87% say that they won’t sell if house prices fall. It also reported that rental demand is the same or stronger than it was six months ago. Recently there have been calls from some MPs and local authorities for controls on what they see as the damaging buy-to-let market, claiming that it is distorting the property market generally, forcing up prices and crowding local buyers out of the housing market. The all-party Housing Select Committee’s report on affordability and the supply of housing urges government to give local authorities more powers to limit the amount of buy-to-let properties in certain areas. Ironically, it might be this kind of political move that will distort the market and could drive those on relatively low incomes out of certain areas of our towns and cities.