David Whittaker of Mortgages for Business looks at how the investment market has changed
A decade ago the buy-to-let investment concept was developed by Andrew Reeves of the Association of Residential Letting Agents (ARLA) along with a group of eight mortgage lenders.
Residential property investment prior to this point was largely the realm of professional landlords and was carried out under complex commercial terms. Today, the majority of banks and building societies are involved in the buy-to-let market under various brands and buy-to-let represents eight per cent of all UK mortgage transactions.
Amateur investors surged to the market in the early years of this decade as house prices enjoyed consistently strong double-digit growth each year. The fortunes of the buy-to-let market in the past two years have been more patchy: amateur activity has dwindled, although signs in recent months are beginning to suggest that smaller investors are beginning to return to the market.
Despite the hype surrounding buy-to-let investment, the amateur investor is still very much in the market’s passenger seat. According to 2006 Council of Mortgage Lenders statistics the large-portfolio landlord remains dominant. Thirteen per cent of landlords own 74 per cent of the buy-to-let stock and – perhaps more striking - 53 per cent of landlords own a mere three per cent of the stock. So despite the growing number of people active in the buy-to-let market, and despite the cultural changes this development has ushered in, amateur investment impact remains relatively small.
Lending on new build properties is now subject to tighter lending criteria and increased scrutiny, with some lenders exiting the new build buy-to-let market altogether this year. Many lenders now require a 25 per cent to 30 per cent deposit compared to just 15 per cent in the final quarter of 2005.
New build properties, particularly in city centres, are showing signs of oversupply and assessing the true market value is difficult. If a lender overvalues a property, then in proportion they could lend the borrower too much money in relation to the true property value.
The affect of the Housing Act on houses of multiple occupancy which came into force in April this year still remains to be seen. There is still a great deal of confusion among individual councils about which properties need a licence, so the first prosecutions under the act are liable to happen in the next six months.
The dynamics of the market have changed significantly with increasing competition between lenders offering more keenly priced products. Ten years ago buy-to-let was the territory of a few specialist lenders who priced on commercial property terms, resulting in high mortgage rates and the need for a 30 per cent deposit!
As the market has matured, terms have changed. More and more lenders have entered the market, increasing the pool of money being advanced and thus competition.
Loan-to-value (LTV) ratios - the amount a lender is prepared to forward as a percentage of a property’s value - have risen in incremental five per cent shifts up to the current market norm of 85 per cent. In recent weeks selected lenders have raised the bar higher and are beginning to offer 90 per cent LTV for investors willing to match higher fees and increased lending margin requirements for borrowing at this level.
The property market is likely to continue to favour the investor as competition intensifies and lenders continue to find ways to differentiate themselves.
It seems plausible that given the short history of the market, 90 per cent LTV will become the new market norm. Investors can expect more finely priced products to become available and especially at lower loan-to-values, although investors should also expect fees to remain higher than residential mortgages.
David Whittaker is managing director of Mortgages for Business, a company that has been at the forefront of the buy-to-let mortgage sector since the market inception ten years ago. Call 0845 345 6788 or visit mortgagesforbusiness.co.uk.