The lender said that 2010 had provided a solid base for the buy-to-let market to build upon over the next year, with gross advances estimated to be 10% up on 2009.
However, Nigel Terrington, chief executive of the Paragon Group, cautioned that it would be “some time” before lending levels were consistent with normal market conditions.
Buy-to-let lending will be stimulated by continuing strong tenant demand next year, particularly with the proposed changes to social housing, he said, while commercial brokers will have strong opportunities in more complex areas like Houses of Multiple Occupation properties.
Low levels of activity in the owner-occupier market will also continue to put pressure on the private rented sector, Terrington said.
“Landlords should profit from lower void periods and strengthening yields given rising rental levels and a flat housing market. I expect the buy-to-let mortgage arrears level to be flat to falling as landlords benefit from excellent levels of tenant demand and low borrowing costs, although landlords must be cautious of tenant unemployment and arrears.
“There will be a dislocation between the job losses caused by public sector spending cuts being ironed out by growth in the private sector and we are likely to see unemployment rise during the year. Landlords need to ensure that they have adequate rent guarantee insurance in place to protect themselves against defaulting tenants,” he said.
The level of buy-to-let funding is predicted to improve in 2011, as new lenders enter the market.
However, Terrington said lenders’ focus on smaller-scale landlords risked seeing too many lenders concentrated on that end of the market at the expense of professional landlords.
He said: “There are more and more lenders squeezing into the same space, competing on price, but with little product innovation. The buy-to-let market is crying out for product innovation and diversity and we will not get that if too many lenders are chasing after the same customer.”
Terrington added: “It is vital that new lenders entering the market do so with a robust valuation process that recognises that buy-to-let is a very different proposition than the owner-occupier market. That sounds like a simple task but too many lenders got it wrong before the credit crunch and were burnt as a result. Valuing a buy-to-let property as if it were an owner-occupier property doesn’t work, it requires specific expertise and experience.
“Lenders must also be cautious on affordability. Certain lenders are testing affordability on a short-term product rate, rather than a higher reference rate, which could be dangerous when interest rates start to rise, as they are expected to do in 2011. Risk and affordability is not the same thing and the industry must be conscious of this as it underwrites new business.”
