Happy Birthday Buy To let

Overview of the Buy-to-Let Mortgage Market

Introduction

• History: This summer marks the tenth anniversary of the buy-to-let mortgage. Mortgage Express (part of the Bradford & Bingley group) was the first to trial a dedicated buy-to-let mortgage product in July 1996, and currently holds a market share of about 20%.

Evolution

• Legislation: The introduction of buy-to-let mortgages followed new legislation in The Housing Act, which gave landlords greater power to evict tenants not paying rent. In September 1996, the Association of Residential Letting Agents (ARLA) launched these mortgages via a panel of lenders.

Market Growth and Trends

• Lender Participation: The number of lenders offering buy-to-let products has grown to around 70, with about 50% of all buy-to-let loans being written by six ARLA panel members: Paragon, GMAC, Mortgage Express, Birmingham Midshires, NatWest, and The Mortgage Business.

• Risk Profile: Buy-to-let mortgages have a lower risk profile compared to residential loans. Data from the Council of Mortgage Lenders showed that 0.68% of buy-to-let mortgages were in arrears for more than three months, compared to 0.97% of residential loans.

Market Impact

• Demand: High house prices and a growing population have increased the demand for rental properties. The sector now represents approximately 8% of the total housing stock in the UK.

• Product Changes: Initially, buy-to-let mortgages had high interest rates (up to 4% over the Bank of England base rate) and low loan-to-values (up to 75%). Current terms have improved with average loan-to-values at 85%, and rental cover averaging 125% of the mortgage payment, with some lending available at 90% and rental cover at 100%.

Current Trends

• Landlord Growth: 83% of landlords plan to increase or maintain their property portfolios in the next six months. The average portfolio size has grown from three properties per landlord in 1996 to seven in the present year.

• Market Value: Buy-to-let lending has surged from £3.1 billion in 1999 to £24.5 billion in 2005. The market is now valued at over £73 billion and continues to grow.

Challenges and Considerations

• First-Time Buyers: The growth of the buy-to-let market may impact first-time buyers, as they compete for similar properties. Despite government support, the rising market may hinder first-time buyers' ability to purchase homes.

• Future Growth: With increasing student, single-person, and migrant populations supporting the rental sector, rented households are projected to grow by about 3% over the next ten years.

Tools for Investors

• Rental Calculator: To aid in the initial process of buy-to-let investments, First Mortgage Trust has designed a rental calculator available at First Mortgage Trust Buy-to-Let Calculator.

The buy-to-let market has evolved significantly over the past decade, offering improved terms and growing opportunities for investors, while also presenting challenges for first-time buyers.