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A brief history of buy-to-let Prior to 1988, making money as a private landlord was difficult. Tenants had long security of tenure and rent controls making it virtually impossible for landlords to raise rents. Eviction laws were also disproportionately in favour of the tenant.
Changes to the law in the 1988 Hous- ing Act loosened regulation creating the first shorthold tenancy and giving landlords more power to evict troublesome tenants. That made investment in the private rented sector more attractive to private landlords, but the recession and housing crash that followed shortly thereafter between 1989 and 1994 also boosted tenant demand for rented ac- commodation.
The Housing Act 1996 saw further changes to the law that made it impossible to inadver- tently create a sitting tenancy, which further improved the attraction for landlords looking to invest.
Until this point, landlords wishing to invest
in rented property had to take out a com- mercial mortgage which by its nature was expensive, but in 1996, a panel of six mort- gage lenders agreed to launch the buy-to-let mortgage. The initiative was driven by ARLA supported by this panel of lenders. As opposed to commercial mortgages or straightforward mortgages, buy-to-let prod- ucts assessed borrowers taking rates more in line with residential mortgages and also took into account the rental income on a property. At its inception, the idea behind buy-to- let was a long term investment that would perform through both the good times and the bad. It provided a balance of capital ap- preciation over the long term (ARLA puts the average time a property is held at 17.6 years) and rental income.
“The private rented sector isn’t going anywhere fast,” he says. “Around 14% of the UK’s population rents privately today. Homeownership is also reducing and the social rented sector is under pressure.” Heron believes there is also a shift
towards renting on a more engrained basis in the UK. “We’re dealing with quite material changes in the behaviour of young people and their life choices,” he explains. “Social housing is becoming less of a choice and more of a safety net. Young people are buying later and want more flexibility from their housing choices.” Fahim Antonaides, group director at
A brief history of buy-to-let Demand for buy-to-let mortgages was phenomenal, growing from £3.1 billion gross lending in 1999 when the Council of Mortgage Lenders began records to a peak of £44.6 billion in 2007. It has since dropped back significantly to levels only just above those seen in 2001. 2009 saw just £8.5 billion gross lending done in the sector. Part of the reason for the disproportionate and rapid withdrawal of lending in the buy- to-let market was the stigma it developed. During the “frothy” years in the mortgage market, property clubs and developers saw the opportunity to attract investment from “amateur” landlords. These were ultimately consumers wanting to take advantage of the seemingly endless rise in property values by buying to let. Problems occurred when basic funda- mentals ensuring fitness of property for the market and tenant demand were neglected by investors who saw buy-to-let as a golden ticket with no risk attached.
The market came tumbling down when so-called armchair landlords couldn’t rent their properties because of a massive oversupply of the wrong sort of property for tenant de- mand in the area. Mortgages were left unpaid, possessions rose and lenders lost vast sums of money.
Wholesale appetite for buy-to-let assets dried up with the rest of the money markets and as government support for the mortgage market only extended to banks, specialist lenders which historically served the private rented sector ceased lending.
Only this year have we seen positive signs in the market with the launch of Aldermore Mortgages, Precise Mortgages and the return of Paragon Mortgages.
London-based broker Mortgage Centre IFA, highlights the stiff criteria that prevail in the mortgage market as another factor underpinning rental demand. “The main driver of rental income seems to be the average buyer’s inability to raise the level of deposit needed to reach affordable borrowing – in most cases 25%,” he says.
“Anything less and the borrowing can become prohibitively expensive. The fact that people can afford to pay high rents is evidence that affordability is not so much the issue but rather raising the deposit is – thus forcing more and more potential buyers to opt for renting property instead.”
30 mortgage introducer NOVEMBER 2010
“The buy-to-let market is now proving very resilient. Six months ago lenders were retreating from this sector and it was left to a few forward thinking lenders to
remain in the market. Their faith has been restored as there are now approximately 300 products available and loan to values are now improving, let’s hope it continues.”
Mike Fitzgerald, sales director,
Brentchase Financial
“The need for rental property is not going anywhere. With first time buyers unable to get on the property ladder, there is a healthy market for
those in a place to benefit. With more lenders either coming into the market or those that are there wanting to increase share, we could see the rental sector strengthen further as we head into 2011.”
David Sheppard, managing director, Perception Finance
“The UK market will continue to dampen down for some time to come and we will move more in line with continental Europe where it is far more
common to rent. Rental demand will increase and while the spectacular capital gains of the recent past may not be available, there remains a long term opportunity to build a solid capital base in residential property.”
Martin Wade, director,
Your Mortgage Decisions
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