Current issues and talking points in the buy-to-let mortgage market:
Buy-to-let market continues steady growth in 2011
Paul Howard, Head of Corporate Accounts at Nationwide, discusses his view of the buy-to-let mortgage market and some of the opportunities that the market could present for brokers and landlords.
With slow economic growth and flat house prices being widely predicted, it is evident that 2011 will again be a tough year for the mortgage market – yet nothing is more fundamental than the continuing need for homes, whether bought or rented.
It’s still tough for first-time buyers
Since the credit crunch, lenders have generally implemented stricter lending requirements and asked for bigger deposits from borrowers, creating some additional barriers to homeownership. Many major lenders have indicated that they want to lend more during 2011, but only if they can do so prudently and, although higher LTV deals are starting to re-appear, it can still be a tough market for first-time buyers. The Government continues to add pressure on lenders to come up with appropriate schemes to increase lending and ensure first-time buyers and those looking for shared ownership and shared equity deals can still get access to funding.
For example, the Government has very recently launched FirstBuy1, a new scheme specifically designed to help those struggling to buy their first home due to the need for large deposits. Over 100 house builders are committed to supporting the new scheme, which will help over 10,000 first-time buyers in England over the next two years. As a lender that is keen to be supportive of the housing market, Nationwide Building Society is one of a small number of lenders to have already confirmed it will support FirstBuy. Despite this and other schemes and products specifically available to would-be first-time buyers, homeownership will undoubtedly remain an aspiration for many, meaning they will have to continue renting or living with family.
Factors buoying the buy-to-let market
There are now more one-person households than in previous years. This is expected to grow in the future, with one-person households expected to increase by 159,000 per year until 2033, equating to an increase in households of two-thirds compared to 20082. This makes property ownership less affordable for this group of people, as a single person is less likely to be able to afford to buy a house than a couple.
Furthermore, with the number of university applications remaining strong3, landlords can probably rely on students and the parents of students to continue to support the buy-to-let market.
The UK is experiencing a major shift from presumptive homeownership to a situation where a greater number of people are renting for the long term – and being comfortable with it – much like most of continental Europe.
Demand for quality rented accommodation continues to outstrip supply, particularly with the continued growth of single person households and a shrinking social housing sector, leaving an estimated five million people waiting for social housing4.
The buy-to-let market is growing again
Against this backdrop, the buy-to-let market continues its growth year on year. While nowhere near the volumes of 2007, last year’s buy-to-let lending reached over £9.5 billion, up from the £8.5 billion in 20095 and figures are expected to rise again in 2011.
Confidence in the buy-to-let market is getting stronger and there are indications that rising demand is driving growth across the buy-to-let sector. This increase in demand was underlined by the latest English Housing Survey, which showed the number of households now renting privately has risen by 1.3 million since 2001, from 2.1 million to 3.4 million 2009-106. This activity is being supported by the increasing number of buy-to-let mortgage products, which have hit their highest level since October 2008. In May 2011, there were 463 buy-to-let products available, a rise of 55% on the 299 that were available a year earlier7.
While some providers have reduced their offering, we are seeing others return to the market. A small number of experienced providers have strengthened their position in the market, such as The Mortgage Works (TMW), owned by Nationwide. TMW has consistently concentrated on offering practical and creative products backed by competitive pricing and is one of the few buy-to-let providers lending up to 80% LTV. TMW also gives the option of free legals and free valuation fees for buy-to-let purchase – making TMW the only buy-to-let lender to offer such an incentive.
Now may be a good time for landlords to expand their portfolios
With these factors in mind, existing landlords may be considering expanding their portfolios, and prospective landlords may be encouraged enough to join the market. It is easy to see why. According to LSL Property Services’ buy-to-let index for May 20118, rents rose by 0.5% to £696 per month. This now puts the average rent £30 per month higher than May 2010 – an annual rent inflation of 4.4%. Rising rents and static house prices mean better yields for landlords, though arrears are slightly higher at 11.5% in May 2011 compared to the average of 10.6% in 2010.
So for example, an investor who has £200,000 to invest in the market could choose an alternative to investing in one property. He or she could instead invest in four properties, with deposits of £50,000 in each. This allows the landlord to diversify their portfolio and spread the risks that are associated with any investment. If the investor chooses properties in a variety of different locations, this would also have some risk benefit.
Despite these additional positive indicators, lender caution in terms of levels of deposits required and lending criteria for prospective landlords continues. In the past, prospective landlords could – relatively speaking – easily find a buy-to-let mortgage with just a 10% deposit. However, nowadays lenders are typically asking for deposits of around 15% or more.
Many brokers are now looking at the buy-to-let market and recognising that the economic indicators for the sector are strong. This has led to an increase in the number of brokers who are forming alliances with estate and lettings agents in order to grow their share of the market.
Experienced brokers can really make the difference in highlighting the right deal quickly for their clients, particularly with growing anticipation of interest rate rises later in 2011 driving up costs. But it is in ensuring that potential landlords are fully aware of the responsibilities, and the costs attached, that brokers can provide the greatest service. They are often well placed to effectively guide potential landlords through the peripheral costs. These can include management and maintenance charges, ensuring adequate insurance, and even the costs of regular utility safety checks, as well as ensuring they mitigate any Capital Gains Tax liabilities on the sale of a property which is not the main residence.
With this in mind, it may be prudent for brokers to concentrate on professional landlords who are already experienced in these matters. There are products available for lending to HMOs, limited companies and properties in need of refurbishment, which can increase the scope of intermediaries’ advice. Having said this, products that specifically target the lesser experienced are also available, such as The Mortgage Works’ range of First Time Landlords mortgages.
Why the buy-to-let market is not even more active
With there being so many positive indicators for the buy-to-let market, one may ask why it’s not growing even more. Although buy-to-let gross lending is expected to increase again in 2011, I expect it to be a step rather than a jump.
There are a couple of good reasons for this. First, the lack of house price inflation is a double-edged sword for buy-to-let. On the one hand, stable prices coupled with rising rents provide an opportunity for rising yields. On the other hand, one of the attractions of investing in buy-to-let is to take advantage of the capital appreciation. Without house price inflation, there is no capital appreciation. Of course, the rental yield can still provide a healthy return and buy-to-let should be seen as a long term investment, but capital appreciation would nonetheless be welcomed by many would-be investors.
Another reason why the buy-to-let market is not growing faster is to do with the state of the current economy and the lack of consumer confidence. Although the Nationwide Consumer Confidence Index saw an upward bounce in May 2011, it has nonetheless generally been lower post-crunch compared to the boom years9.
The austerity measures that have been introduced over the past year have arguably created a slight nervousness among landlords in their tenants’ ability to pay rent. This view is supported by the fact that arrears in May 2011 stood at 11.5%, slightly above the 2010 average of 10.6%10.
Summary: headwinds still exist, but buy-to-let is biting back
So, despite the very real challenges, I still think now is a great time for brokers to talk to their buy-to-let clients about possible options, such as increasing their portfolio or refinancing their current arrangements. With house prices now slightly lower than they were a year ago11, potential landlords may even get a good bargain. If they do, they may want to consider dividing their capital into several properties to diversify the risk, rather than investing it into one property. Either way, the buy-to-let market seems to be on the up and both brokers and landlords look set to capitalise.