The btl bounce

26 May 2011 | By Gregor Watt

The buy-to-let market was one of the biggest casualties of the credit crunch, with a number of lenders pulling out of the sector and the loans available cut back to the bone, both in terms of the number of deals available and the terms on offer.

But low levels of funding for residential mortgages, particularly for first-time buyers, has seen rental demand increase steadily in the last two years and lenders are again starting to see opportunities in the market.

The latest figures from the Council of Mortgage Lenders show that BTL lending may not be booming but it is holding up better than the residential mortgage market.

Compared with a year ago, the BTL sector has grown significantly. In the first quarter of 2010, it saw new lending of £2.1bn but this increased to almost £3bn in the first quarter of 2011.

The first three months of 2011 saw a drop in BTL mortgage lending of 3.5 per cent compared with the last three months of 2010 but this compares favourably with the mortgage market overall, which fell by 11 per cent during the same period.

CML director general Michael Coogan says: “Buyto-let continues to progress positively in the context of a stable but still low-volume overall market. Demand for rental property is strong and as more funding becomes available, we would expect buy-to-let lending to increase.”

This steady progress could be boosted as BTL investors see opportunities to capitalise on rising rents and lenders return to the market to meet investor demand.

Rents have risen sharply in the last two years. Figures from LSL Property Services show average rents increased by 0.8 per cent in April and are up 4.4 per cent on a year ago. Areas such as London and the South-east are showing even faster growth, with London rents up by 7.9 per cent since last April and those in the south east up by 5.7 per cent.

As average property prices have declined slightly during this period, rental yields have increased to 5.1 per cent.

David Brown, commercial director of LSL Property Services, says: “Even a slightly stronger supply of property has failed to cool rental inflation as landlords take advantage of the growing number of mortgage products available. Competition is fierce and tenants are paying a premium to secure a property.”

According to Moneyfacts, the number of BTL loans in the market is at the highest level since October 2008. There are now 463 BTL loans available compared with 299 in May 2010.

The steady progress of BTL could be boosted as investors see opportunities to capitalise on rising rents and lenders return to the market to meet demand

Average BTL rates are also improving. The average rate available in May 2010 was 5.3 per cent but this has now dropped to 4.97 per cent.

Moneyfacts.co.uk spokes-person Louise Holmes says: “The demand for rental properties has increased over recent years, mainly due to the credit crisis. The majority of high loan-to-value deals were withdrawn from the resid-ential mortgage market, leaving dejected borrowers little choice but to rent rather than purchase a home.

“These latest figures, part-icularly the reduction in the average rate, suggest the BTL market could be returning to a competitive state. This will no doubt please landlords and property investors who have endured a tough time over the past few years.”

Phoebus Software managing director Paul Hunt says: “Prop-erty prices are on a downward trajectory, largely as a result of caution among mortgage lenders, but the rental market is in rude health as a lack of private rental sector accom-modation and a glut of frustrated would-be buyers unable to get a mortgage has pushed prices up to record highs in the last 12 months.

“This exacerbates the problem for those without large cash deposits as expen-sive rentals make saving for a house deposit more difficult.

“However, looser criteria for buy-to-let mortgages will help increase the supply of rental accommodation, bring down the cost of renting and ultimately prove good news for landlords, tenants and prospective homebuyers alike.”

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