Buy-to-let is an attractive investment at a time of low saving rates and stock market volatility and landlords have hit the jackpot as first time buyers struggle with finance, driving tenant demand and rental prices higher in the process, so the Chancellor, George Osborne has set his goal to create what he described as a “level playing field” between prospective landlords and those buying homes to live in.
He announced in the Summer Budget that tax relief will be reduced from 40-45 per cent currently allowed, down to 20 per cent for all individuals by April 2020. This, along with the abolition of the Wear and Tear allowance for landlords, may discourage some new investors from entering the buy-to-let sector, while others may sell up providing more much needed housing stock on the market.
There are now 2.1million landlords in Britain, up from 1.5million in 2007, who own around 4.6million homes collectively worth almost £1trillion – one fifth of the country’s private housing wealth, but there is still plenty of room for growth in the sector.
Should the move slow the buy-to-let sector of the housing market, as some analysts now anticipate, it may enable more first time buyers, squeezed out by investor driven purchasers, to get a foot on the housing ladder. It should also help to alleviate the Bank of England’s fears that the burgeoning buy-to-let market, which has accounted for a significant share of outstanding mortgages and new home loan lending so far this year, could pose a risk to financial stability in this country, especially as the number of loans to investor landlords in the second quarter has increased by over 25 per cent quarter-on-quarter.
But despite the Chancellor’s crackdown, research shows that buy-to-let landlords have benefited from a booming property market, earning returns of up to almost 1,400 per cent since 1996 – capital growth and returns combined – making it an investment that many people will simply not to ignore, and for good reason.
Top performing investment
Average returns from buy-to-let currently beat all other mainstream investments, including commercial property, UK government bonds, shares and cash and that trend looks set to continue, on the back of soaring demand from tenants.
“An oversupply of people and an undersupply of homes make buy-to-let an attractive proposition,” said Iain Hill of Equifax Touchstone, the market intelligence provider.
The Association of Residential Letting Agents (ARLA) reports that there has been a recent rise in the number of available private rented properties, and yet there is still nowhere near enough homes to satisfy high demand from tenants.
David Cox, Managing Director, ARLA, commented, “To see a rise in available rental properties is definitely a step in the right direction; although with demand remaining the same, we still have a long way to go in achieving a balanced and stable private rented sector.”
An increase in rental properties is good to see but we still have a long way to go to establish a stable private rented sector. David Cox, ARLA.
Accountancy firm PwC predicts that by 2025 more than half of those under 40 will be living in properties owned by private landlords.
It estimates that 7.2million households will be in rented accommodation, compared to 5.4million today and just 2.3million in 2001, as the younger generation is priced out of the market.
Separate figures from the Government suggest that one in three homes will be owned by private landlords by 2032, fuelled in part by the recent overhaul of the pension system that enables over-55s to withdraw money from their retirement savings and invest in property.
Pensioners’ new-found ability to access their whole pension pots combined with the promise of high returns has seen activity in the Buy-to-let market surge. The Government reported in June that £1billion had been taken out of pensions pots so far by around 60,000 people.
Ben Burge of Larkfleet Homes said, “The latest reports and figures confirm that buy-to-let property is an excellent consideration for potential ‘silver landlords’.”
Of course, being a landlord is not without its challenges, but with the latest HomeLet Rental Index showing that overall rent price increases are now running ahead of inflation and house price growth to hit an all-time high of £977 per month in July, up 11.8 per cent year-on-year, many investors continue to rent out their homes at a healthy profit.
The latest buy-to-let index from Your Move and Reeds Rains reveals that the gross yield on a typical rental property in England and Wales increased to 5.2 per cent in July, up from five per cent in July 2014.
The data also showed that the average landlord in England and Wales saw a gross return of £15,632 – rental income and capital growth – in the 12 months to July, ensuring that a typical landlord achieved overall returns of 8.7 per cent, on average.
With high rents and poor savings rates, it’s little wonder that the buy-to-let market is booming. Charlotte Nelson, Moneyfacts.
“House price growth is easing back and this has had an effect on total annual returns. However, rental yields are perking up to compensate,” said Adrian Gill, Director of Reeds Rains and Your Move, part of LSL Property Services.
Charlotte Nelson, Finance Expert at Moneyfacts.co.uk, said, “With high rents and poor savings rates, it’s little wonder that the buy-to-let market is booming.”
Deals flood buy-to-let market
As a result of the growing appetite for investment properties, buy-to-let mortgage product numbers have soared, with the number of deals recently hitting more than 1,000 for the first time since April 2008, marking a sharp rise on the 460 products available just two years ago, according to Moneyfacts.
Ms Nelson explained, “The boom in deals has undoubtedly been boosted by providers taking advantage of the new demand from thousands of pensioners making the most of the new pension freedoms.”
Unsurprisingly, the growth in products has been accompanied by plummeting borrowing rates, which are currently at an all-time low, sparked by today’s competitive lending environment.
According to Moneyfacts, a typical variable buy-to-let mortgage rate fell from an average of 6.84 per cent in August 2008 to just 3.6 per cent in August this year, while the average buy-to-let fixed-rate mortgage has tumbled from 7.34 per cent to 3.8 per cent in the same time period – slashing hundreds of pounds off annual repayments.
Buy-to-let investors can still take out cheaper ‘interest-only’ mortgages, which are now deemed too risky for regular homebuyers, reducing their monthly payments even further.
Looser lending standards
Demand for buy-to-let property continues to be supported by existing mortgage market regulation, which appears to favour lending to investors over homebuyers.
Since the introduction of the Mortgage Market Review (MMR) in late April 2014 there has been a general slowdown in the housing market, as it has generally not supported homeownership.
In contrast, the buy-to-let sector continues to grow, with lenders being free from the constraints of the MMR. Consequently, buy-to-let investors can still take out cheaper interest-only mortgages now deemed too risky for regular homebuyers.
“Owning a property with a mortgage which allows for interest-only payments for an initial period is still preferable in many cases to being forced to rent property from the landlords fuelling the market,” said Simon Checkley, Managing Director of Private Finance.
Interest rate rise looms
The signals are that interest rates are very likely rise next year, which partly explains why it is that many borrowers, including buy-to-let landlords, are now acting fast to secure a low rate by re-mortgaging their existing properties. This also helps them expand by freeing up fresh funds for further buy-to-let acquisitions.
The volume of mortgage approvals in July jumped to its highest level in 17 months, fuelled largely by a significant rise in re-mortgaging, the British Bankers’ Association’s Richard Woolhouse said, “Savvy homeowners are snapping up competitive deals before an increase in interest rates, which most people believe will be sooner rather than later.
However, the individual circumstances of each client, including the size of the cash deposit at their disposal and their level of exposure to debt, will often determine which lenders are best suited to meet the needs of investor landlords and many lenders are now revising their buy-to-let lending criteria, including affordability calculations, with most requiring the rental income to be at least 125 per cent of mortgage payments, based on an interest rate of 5-6 per cent.
Changes include Clydesdale’s increase of its maximum loan at 70 per cent loan-to-value (LTV) to £1million, the Mortgage Works’ increased maximum loan to £750,000 at 70 per cent LTV and £500,000 at 75 per cent LTV, and Keystone’s increase of its maximum loan to £500,000 at 80 per cent LTV and £750,000 at 75 per cent LTV.
The Woolwich, owned by Barclays, is among lenders that now look at a landlord’s overall position, including their residential mortgage and personal affordability check, rather than simply assessing the buy-to-let in isolation, with all new applicants stress tested against Woolwich’s existing rental cover calculation of 125 per cent at the current stress rate of 5.79 per cent.
TSB Intermediary has introduced a minimum income of £25,000 per annum for buy-to-let applications, Accord Mortgages has increased their rental coverage to 125 per cent at 5.24 per cent, Leeds Building Society has raised its minimum income requirement to £25,000 from £20,000, while Natwest’s rental calculation is now 125 per cent at 5.50 per cent.
In contrast, other lenders, such as The Nottingham Building Society, Skipton Building Society and Metro Bank, have stated that they have no immediate plans to amend their lending criteria.
There are now 2.1million landlords in Britain, up from 1.5million in 2007, who own around 4.6million homes collectively worth almost £1trillion – a fifth of the country’s private housing wealth – and yet the Intermediary Mortgage Lenders Association estimates that landlords will own a third of all UK properties within 15 years, suggesting that there is plenty more room for growth in the buy-to-let sector.
LSL Property Services www.lslps.co.uk
Larkfl eet Homes www.larkfl eethomes.co.uk
Association of Residential Letting Agents www.arla.co.uk
Equifax Touchstone www.equifax.co.uk
Private Finance www.privatefi nance.co.uk
British Bankers’ Association www.bba.org.uk
Mortgage Advice Bureau www.mortgageadvicebureau.com