Buy-to-let remains strong
by Jonathan Cornell
The credit crunch has decimated competition among lenders in the buy-to-let sector but the resilience of the market remains as does the longevity of professional landlords.
The buy-to-let market has probably suffered more than the residential market as a result of the credit crunch. The majority of fledgling lenders set up in the past couple of years focussed on developing mortgage ranges for specialist market sectors, such as private rental, rather than owner occupiers, because the profit margins were higher. And then along came the credit crunch, forcing many of them to cease trading due to a lack of funding. The competitiveness of the sector has consequently been decimated.
The third largest buy-to-let lender, Paragon, has suffered greatly, due to its reliance on wholesale funding – funding from other financial institutions rather than their retail clients. It has had to cease trading, which has resulted in a reduced choice of mortgages for buy-to-let clients.
In the past couple of years, high street lenders such as Cheltenham & Gloucester have played a much bigger role in the buy-to-let market.
Abbey started offering buy-tolet loans on a pilot basis but has withdrawn from the market to concentrate on its mainstream residential mortgages.
While the buy-to-let sector never reached the dizzy heights of more than 100% loan-to-value - whereby lenders would lend 100% of a property’s value - some lenders offered 90% LTV. But these loans were rare, with the maximum LTV typically 85%, which it remains today - 90% LTV loans have totally disappeared.
The new-build buy-to-let market has experienced incredible change, to the point where it is a shadow of its former self. Borrowers, and consequently their lenders, have suffered as a result of the oversupply of new-build flats in many urban areas, such as Manchester and Leeds - it has made it difficult for them to let their properties and, therefore, repay their mortgages.
Many of these new-build properties were bought off-plan (i.e. paid for in advance of them being built). Developers desperate to sell properties turned to property clubs, which offered to bulk sell their units. The clubs were very successful at selling these properties by offering significant discounts on their guide prices, which appealed to inexperienced buyers - some of which even bought without seeing what they were getting for their money.
It was easy for buyers to overlook the fact that their rental income was lower than their mortgage repayments while the value of their property increased. But, as prices have fallen, many buyers have begun to question whether they have made the right investment choice and whether it is worth supplementing their rental income to cover their repayments. The only solution for those who think not is to sell their property at a loss.
Lenders have reacted to the oversupply issue by slashing LTVs on new-build properties. Some lenders have even stopped lending on new-build flats, which, coupled with the fall in the number of active lenders in the buy-to-let market, has restricted transactions altogether. It is now very difficult to get a deal offering an LTV of more than 75% for a new-build flat.
Lenders are also very nervous about allowing mortgage brokers to instruct the valuations on newbuild properties, preferring to instruct valuations centrally and choosing surveyors at random.
Before the credit crunch, lenders reduced their rental calculations – which determined how much they would lend – in a bid to win business. Historically, rental calculations, not income, determined lending limits, since buy-to-let mortgages were supposed to be self-financing.
Typically, rental income needed to be between 125% and 130% of the mortgage repayment – it often meant that a landlord could not borrow the maximum LTV unless the rental of their property fit with lenders’ rental calculations.
However, over the past few years rental income has only had to cover 100% of a landlord’s mortgage payments, which did not allow for any other expenses, such as repairs or void periods. Some lenders even launched ‘non-status’ buy-to-let mortgages whereby clients could borrow 75% or less of the value of a property without a lender asking for a rental assessment from the surveyor.
Lenders are now much more risk averse and rental assessments have returned to their pre-credit-crunch levels.
It is likely that rental yields will increase in the short term. When property prices fall, some people stop buying, hence transaction levels are significantly down on last year.
When people stop buying the demand for rental property increases and this bolsters rents.
Many amateur landlords will get nervous about falling property prices and increased mortgage rates but the experienced landlords will use the current market conditions to expand their portfolios.
Distressed sellers who need to sell their properties quickly will create bargains, the supply of new-build properties will slow down, and economic immigration will ensure that the demand for rental properties will increase, as well as rents.
The general performance of the buy-to-let market has never been really tested in a housing market as tough as it is now. Nevertheless, I think the sector has a sound future.