Is buy-to-let dead?
Buy-to-let is a vital component of the UK housing market, not only because landlords supply non-homeowners with places to live but also because they keep property transactions going.
When house prices first started to fall last year, experts warned that buy-to-let investors might run scared, potentially prompting a house price crash. This didn’t happen – in fact, just a few months ago reports suggested buy-to-let was booming, benefiting from larger numbers of renters and cheaper property price-tags.
However, this may all be about to change. The nationalisation of Bradford & Bingley, the UK’s largest buy-to-let mortgage lender, has stoked that the sector is dead. And according to financial data provider Moneyfacts, some 500 residential and buy-to-let loans literally disappeared overnight when plans to nationalise B&B were announced, taking the number of buy-to-let loans available in the UK to just 481.
So, is buy-to-let dead?
The message from lenders, buy-to-let mortgage brokers and landlords alike is “no”.
The Council of Mortgage Lenders (CML) says that, when compared with the residential mortgage market, buy-to-let continues to hold up well. Its figures show that only 1.10% of all buy-to-let mortgages were three or more months in arrears in the first half of 2008, compared with 1.33% in the residential market.
The CML also claims that Bradford & Bingley’s book contributed to the majority of the buy-to-let figure, with 2.29% of its whole book three or more months in arrears.
In addition, the National Landlords Association (NLA), which represents almost 20,000 individual landlords, states that only 25% to 30% of landlords use buy-to-let mortgages to finance their property purchases - meaning a large number of landlords are free from mortgage-related concerns.
The NLA also argues that there are sound fundamentals underpinning the UK’s rental market, such as rising immigration, increasing numbers of students and more single person households.
“It is simply not true that the nation’s landlords are now facing some sort of crisis,” says Simon Gordon, a spokesperson for the NLA. “For the cautious and mature investor who has bought the right property in the right location, they will be seeing an increase in rents and can expect demand to keep climbing.”
However, Gordon admits that some landlords who bought a property recently will be feeling the pinch of falling property prices.
Katie Tucker, technical manager at mortgage broker, Mortgageforce, says that landlords tend to opt for mortgage with high loan-to-values (i.e. the ratio of the loan to the property’s value) because the higher debt attracts tax relief. However, with Nationwide reporting a 10.5% annual fall in property values and literally only a handful of 85% LTV remortgage deals still available, those coming to the end of discounted deals may struggle to bag a bargain.
Earlier this week the buy-to-let lenders UCB Homeloans and The Mortgage Works (both owned by Nationwide Building Society), and Bristol and West all pulled their mortgages in response to Bradford & Bingley’s departure from the market, while HBOS-owned BM Solution withdrew 75% of its offerings.
“When big players fall back, others have to follow suit to avoid being swamped by the riskier mortgage applications. This leaves little affordable choice for remortgages,” says Tucker.
The fast disappearing buy-to-let market could lead to thousands of buy-to-let landlords coming to the end of their introductory rates and being forced to stay with their lenders’ uncompetitive standard variable rate (SVR). Unless they are able to increase rents, then most will have to put more of their own income towards paying the mortgage, which could be problematic considering the rising cost of living and the fact that the loans on their own homes may also have increased.
“As the landscape is precarious at best, landlords within three months of a remortgage should see a broker immediately,” urges Tucker.
David Hollingworth, a mortgage broker at London & Country, believes that it is not all doom and gloom. “The buy-to-let sector is a mature market,” he says, “There will be many landlords now who have witnessed many years of house price growth, and although property prices are falling that they will still have a significant amount of equity and good deals will still be available.”
Hollingworth says that landlords approaching the end of their deals should start by checking what their rate will revert to. “Buy-to-let SVRs aren’t that far off introductory rates, so the increase in payments might not be so bad,” he adds. “But always go to a broker who will be able to check the whole market to see what you could be offered.”
Another positive note is that buy-to-let loans are based depends on the property’s value and its rental potential.
“The bottom line is that there will still be deals available,” he says. “While the market is not as rosy as it once was, it’s far too mature to be the death of buy-to-let.”
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.