Not so long ago, buy-to-let was seen to be a sound property investment – a proven, productive and profitable piece of business.
On an industrial scale this entailed super-rich individuals or large consortia buying houses, apartments or flats, if necessary sprucing them up a little and then letting them out to reliable tenants whose rent covered the owner’s or owners’ mortgage repayments as well as providing surplus to be invested in more property or deposited in a pension pot.
Meanwhile, with property prices seemingly destined to go on rising, the landlords’ investment continued to grow in value.
In the vernacular, a nice little earner from whatever angle one viewed it. But at a much more modest level, houses, apartments and flats were bought by ordinary people, too. They included parents who saw the merits of providing affordable accommodation for their offspring who were studying at university. And they, too, saw that as an investment which would continue to increase in value. Others who entered the world of buy-to-let included young couples who, having previously owned two homes, moved into one when they married. They kept the second, however, turning it into a rental property which more than paid for itself whilst also appreciating in worth.
Then there were those who inherited property following the death of an elderly parent. Rather than rushing to sell the home left to them, they kept it on and rent it out.
It remains to be seen how any of those highlighted above will fare now that Chancellor George Osborne appears to declared war on the UK buy-to-let market which has mushroomed in size in recent years.
With speculators buying up swathes of property for rental in London in particular, he is moving to offset that trend, given that it is threatening to destabilise the economy in general and house prices in particular.
To that end he is in step with the Bank of England which also is acting to head off property speculators at the figurative pass. This follows a series of warnings by the BoE’s Monetary Policy Committee about the impact of high levels of mortgage lending to buy-to-let borrowers.
The figures underline the MPC’s concerns; from January 1 to September 30, 2015, buy-to-let lending soared by 10%, compared with a rise of just 0.4% in the owner-occupier sector.
In mid-2015 there were 1.7 million buy-to-let mortgages worth a staggering £201 billion. That translates as 16% of the UK’s residential mortgage market. In 2002 the share was 2%. By 2008 - when things went so disastrously wrong - it had risen to 12%.
As a result of this trend, the Chancellor has signalled his determination to restrict the size of loans to landlords. If he and the Bank of England are united on this one, mortgages advanced to buy-to-let property owners will be assessed strictly in accordance with the value of the property AND rental repayments on it.
That is because a major concern at this stage is that landlords may run into mortgage repayment problems in the not too distant future.
There are reasons for this anxiety, not least because landlords tend to take out interest-only loans. So if, due to them encountering payment difficulties, they chose to sell, that could see the marketplace swamped with for-sale properties, a scenario both George Osborne and BoE governor Mark Carney are very keen to avoid.
Between April 1 and June 30, 2015, a massive 85% of newly-issued buy-to-let loans were of the interest-only variety, so misgivings about that are understandable.
Already we have seen the Chancellor make changes which mean less tax relief for buy-to-let property owners. To that he has added an increase in stamp duty, pushing it up by a full 3%.
So banks are becoming noticeably more cautious when it comes to lending for buy-to-let or second property purchases. Again, that is understandable, recent history having shown that buy-to-let mortgages are over two times more likely to end up creating problems for banks than those given to conventional owner-occupiers.
To that add the fact bankers believe that landlords will pose a real threat to the economy in the event of a slowdown or downturn in the property market. Why? Because in the bankers’ eyes, when the going gets tough, buy-to-let landlords are much more likely to default than home-owners.
The BoE’s end-of-third-quarter 2015 statement confirmed those misgivings, stating: “Since 2010, rates of credit loss on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers. Assessed against relevant affordability metrics, buy-to-let borrowers appear more vulnerable to an unexpected rise in interest rates or a fall in income.”
With the rental sector growing quickly, first-time buyers are finding it harder to get a foot on the bottom rung of the property ladder. So that’s the circuit; more buy-to-let borrowers snapping up houses, flats and apartments and by so-doing gobbling up an ever-increasing percentage of the mortgage pie, thereby making it harder and harder for young would-be home-owners. But, in the background, the shadow cast by a bad repayment record coupled with vulnerability to changes in property prices or interest rates.
If you are a landlord worried about any of these issues, now is the time to seek help. Contact any of our team at Aria Residential, Belfast, phone 028 9059 9599