The UK buy-to-let mortgage market continues to challenge intermediaries and property investors alike; but there is business to be written and there are some signs that the worst may be over.
Certainly, the current tenant demand for rental property is high, rental yields are on the increase and professional landlords are still on the look-out for deals that will enable them to expand their portfolios.
In a recent survey conducted by TBMC in August 2009, the results showed that over a third (37%) of landlords questioned said they would purchase new buy-to-let
properties in the next 12 months.
Just under a third (30%) said that they would not expand their portfolios; and a third (33%) said they were unsure. The survey also showed that 71% of landlords would use a mortgage broker to arrange their
finance.
These results demonstrate that many buy-to-let investors still have an appetite to purchase properties, and that there are business opportunities for intermediaries in the buy-to-let market.
The main problem for those seeking a buy-to-let mortgage in today’s market is the lack of funding. The number of buy-to-let products on offer is drastically reduced compared to over a year ago.
A recent report from finance website Moneysupermarket demonstrates this, showing that the number of products is 70% lower than it was 12 months ago, while the number of enquiries for buy-to let mortgages has increased by 50%.
There is clearly a widening gap between the supply and demand of buy-to-let mortgages, and another industry survey – Paragon Mortgages’ last PRS Trends Report – shows that 43% of landlords reported the lack of available finance as the main reason why they are unable to
expand their portfolios.
There are a number of reasons why the number of buy-to-let mortgages has decreased so dramatically. A very significant factor is that the financial markets remain frozen, leaving specialist and non-retail lenders completely out of the game as they are unable to raise new funds to lend. Consequently the buy-to-let mortgage market now consists of just a handful of balance sheet lenders who have access to retail deposits.
Some buy-to-let lenders have been lobbying Government to offer liquidity
schemes for specialist lenders – not just high street banks and household names
– because until specialist buy-to-let lenders are back in the market, the range of lenders
and products available will remain limited. Although there is only a limited choice
of products available, there are some competitive deals to be found for the right
applicant profile. There are some good fixed rate deals available and with Bank
base rate still at 0.5%, many trackers look attractive.
However, there is difference of opinion among intermediaries, landlords and industry commentators about what is going to happen to interest rates, and this is reflected in the deals being chosen.
Although property investors have the appetite to borrow and there are some
attractive products on offer, the number of buy-to-let mortgages actually completing
is relatively low. Lenders’ criteria are still very stringent and credit scoring is often
used to decline applications, sometimes unpredictably.
On a positive note though, it appears that lenders have stopped tightening
criteria any further and some have recently increased maximum loan to values from
70% to 75%. Although this is a far cry from a return to 85% and 90% lending, it is a
step in the right direction.
The difficulty in obtaining buy-to-let mortgage finance can be very frustrating
for intermediaries, and certainly some of TBMC’s biggest introducers of buy-to-let
business have diversified and focused on other revenue streams to supplement
their income.
Non-regulated brokers have probably been affected the most though as
many lenders now only accept applications from FSA-authorised brokers, despite buyto-
let mortgages being unregulated. There has been a noticeable shift in opinion about whether or not buy-to-let mortgages will become regulated in the near future.
A couple of years ago, the majority of intermediaries and industry pundits agrees that buy-to-let mortgages would probably remain unregulated as they are essentially a commercial transaction undertaken by informed investors capable of assessing the risks involved and therefore not in need of excessive protection.
Opinion seems to be changing, with a growing number of people thinking that
buy-to-let mortgages are likely to become regulated in the future. Why this should be
so is unclear. There have been a number of articles in the media about rising buy-to-let
repossessions and other horror stories, perhaps influencing some to think that
buy to let has suddenly become very risky, which it not the case.
Also, the FSA is under pressure to regain its standing after the UK’s financial meltdown, and will be trying to clarify and perhaps redefine its role within the financial services industry. This does not mean that excessive regulation is the answer.
Although it remains to be seen whether the regulation of the buy-to-let mortgage
market ever comes to pass, it is important that the private rental sector thrives. Any
intervention from authorities should be concentrated on encouraging the development
of the sector not hindering it.
