News Review: Buy-to-let
Buy-to-let may not be booming but it is recovering by
John Heron, managing director, Paragon Mortgages
there has been a noticeable shift in the media’s attitude towards the buy-to-let market in recent weeks. Headlines such as ‘Back from the dead’ have peppered the mortgage trade press, and we have even seen some of the national per- sonal finance sections writing about how to make money from buy-to-let again – some- thing they haven’t done for nearly three years. So is the buy-to-let market
really on the road to recovery? the short answer is yes, but it is still very early days. the fact is that buy-to-let and the pri- vate rented sector more gen- erally have fared much better through the recession than
many commentators would have thought possible. Land- lords are experiencing high demand for their property and want to buy more, but lender confidence remains fragile, and the market is still suffering from a significant lack of mortgage funding. moneyfacts recently said
that the number of buy-to-let mortgage products has risen by approximately 70% since the low of September last year and there are currently around 300 products avail- able. But compare that to the high of august 2007, when there were over 3,500 prod- ucts available, and the mar- ket is down by over 90%. and product counts don’t tell the full story; there are a lot of ‘me too’ products in there and far too little genuine innovation. Whilst it is clear that there
was too much capacity at the peak, and that unsuitable bor-
Fears over the impact of a Capital Gains Tax (CGT) increase on residential property investors have been overplayed. One survey suggested that a quarter of landlords could sell because of an increase in CGT, but that is simply not going to happen.
As we found out towards the end of last month the rise in CGT was only to 28%. Why would landlords want to sell in the current market when their funding costs are so low and they are enjoying increasing rental incomes due to high levels of tenant demand? The majority of landlords are now on their lender’s reversionary rate and are enjoying some of the lowest borrowing costs on record, along with the healthy margins that come with it. In addition, landlords will typically hold their investment for the long-term - 17 years according to the Association of Residential Letting Agents. The fiscal regime is just one of the aspects they consider when making an investment, and they have proved this by investing in times when the rate of CGT was much higher than it is today.
8 mortgage introducer JULY 2010
rowers were able to borrow money too easily to purchase the wrong type of property, there needs to be a better balance between mortgage supply and investor demand. Professional landlords, those who will drive the market’s growth, have great difficulty finding the finance they re- quire from the traditional buy-to-let market and are instead using commercial fi- nance, paying cash or sitting on their hands. although we have seen
several new lenders target buy-to-let, don’t expect gross advances to be significantly higher than 2009 levels by the end of the year. the likes of Kensington, aldermore and Precise mortgages have all launched buy-to-let products in recent weeks, and addi- tional competition for the two dominant players – nation- wide (via tmW) and Lloyds
Whilst we may see some landlords taking
profits on certain properties, a mass sell- off is both unrealistic and undesirable. This Government does seem to have a genuine appreciation of the benefits a vibrant PRS can achieve. We have already seen some positive steps taken by new Housing Minister Grant Shapps through his decision to scrap proposed regulation of landlords. Landlords are already highly regulated and Shapps quite rightly says that local authorities should make better use of their existing powers to police the sector rather than create more red- tape and bureaucracy.
The buy-to-let market is clearly showing signs
of recovery but it will be interesting to see what impact the coalition government will have on economic confidence. For now the signs are positive but in order to maintain momentum lenders need to play their part in responding to trends with in the market to cater for a potential increased demand in rental versus home ownership.
Banking group – is healthy and welcomed.
Funding issues But let’s not kid ourselves. the market still remains un- der-funded, particularly for those professional landlords who want to build portfo- lios, and the products from the new entrants to the mar- ket are geared towards small investors. For example, ap- plicants with five buy-to-let mortgages with other lenders won’t be able to apply for any of Precise’s products. the only lender that ap-
pears to be really stretching the boundaries and address- ing more complex transac- tions is tmW through the recent extension of its cri- teria for more professional landlords and in particular the launch of its 80% loan- to-value products. this is a confident step from an ex- perienced lender and will genuinely improve supply to buy-to-let investors in a meaningful way. if there are competitive products available, i’m con- fident that investors will buy. recent national Landlords association research showed that landlord confidence is currently at a two-year high, whilst Paragon’s own trends research shows that one in five landlords want to pur- chase in the third quarter of the year, which is double the number that said they would purchase during the second quarter. there is obviously a big dif- ference between intent and ability to buy, and that gap is too wide at present due to the continued lack of mortgage funding.
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