Buy to let is booming but there are warnings that the market should not get too carried away by its success.
Figures released last week by the Council of Mortgage Lenders show that 330,000 BTL mortgages worth a total of 38.4bn were taken out in 2006. This represented 11 per cent of all new lending – a 48 per cent increase in volume and 57 per cent increase in value over 2005.
Director general Michael Coogan says: “The buy-to-let market performed more strongly than the wider market over the course of 2006. With evidence from sources of strong tenant demand, rising rents and falling void periods, BTL looks set to remain popular and successful.”
The figures are hardly a surprise as BTL lenders have been in buoyant mood over the last three months. The sector has become comfortably the biggest specialist niche, dwarfing the sub-prime market that the CML estimated in November was worth no more than 16bn in 2005. BTL also eclipsed the overall market growth figure of 20 per cent.
But before the sector starts patting itself on the back, there are a few hurdles that it may have to overcome.
First, there have been predictions from repossession litigation specialist Moore & Blatch that arrears and repossessions could rise in future. In fact, BTL repossession figures are broadly in line with the whole market, which witnessed a dramatic 65 per cent increase last year.
Interest rate increases could hamper borrowers’ ability to repay their loans, compounding increases in repossessions. There are also fears that the growing trend of sub-prime BTL, rising loan to values and a reduction in the amount of minimum rental cover required may mean borrowers become too stretched.
London & Country head of communications David Hollingworth says: “While the market continues to be healthy, you have to wonder whether sub-prime BTL is wise for people who are already struggling.”
CML data shows that average LTVs have risen steadily from 75 per cent in 1999 to 85 per cent last year. The current ceiling for most lenders is 90 per cent.
The CML said two weeks ago that while BTL arrears have been traditionally lower than the mainstream market, the gap has been narrowing over the past few years. Despite its predictions that the trend would continue into last year’s figures, only 0.59 per cent of all BTL loans were in arrears in 2006, down from 0.65 in 2005, while the mainstream figures have remained roughly the same.
It is impossible to compare repossession statistics over time as 2006 was the first year they were fully compiled by the CML but figures show that 0.14 per cent of all BTL properties were repossessed last year, broadly in line with the percentage of repossessed properties, at 0.15 per cent, for the entire market.
The figure for properties in possession, at 0.06 per cent of all loans, was the same for BTL and the entire market.
Moore & Blatch’s lender survey shows the BTL market is the second most likely sector, after high-income-multiple business, to be affected by rising arrears and repossessions.
Mortgage Express head of BTL Gus Park stresses that the sector is in rude health but believes it will attract more arrears as it matures.
He adds: “Landlords have greater knowledge and feel more comfortable in a market with relatively low rental yields. They are investing for the long term. 2006 was a spectacular year for the BTL market and we believe there is plenty of room for further growth.”
The lender with the most to crow about is BM Solutions, which overtook MEX to become the biggest BTL lender in 2006. Head of sales Chris Pearson says: “Attaining the top spot is testament to our focus on providing market-leading products in this sector.”
Alliance & Leicester head of intermediary mortgages Mehrdad Yousefi thinks the signs point to further growth over the next few years. He says: “It is encouraging that more than half of the BTL lending in 2006 related to the purchase of new investment properties rather than remortgaging and it would not be surprising if this trend continues. The BTL market looks set to continue to grow.”
He points out that there was a 20 per cent increase in BTL lending in the second half of 2006 compared with the first half, which he says was helped by attractive pricing and flexible lending policies, along with the return of portfolio landlords.
A&L entered the market last year and has been joined recently by Abbey. Many of last year’s new lenders such as Close Mortgages and Edeus have entered the BTL sector and Basinghall Finance, launched last week, is also set to unleash a BTL offering.
That will increase competition and could see criteria loosened in the search for market share. There have been well-documented problems for borrowers and lenders with the relaxing of criteria in the sub-prime sector. The BTL sector must learn from those mistakes to continue to prosper.