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The buy-to-let end game

At a recent debate hosted by Paragon Mortgages, a panel of industry experts discussed the challenges and opportunities facing the UK buy-to-let market.

Predictions for growth this year were optimistic, as rising rents are expected to lead to a more landlords entering the market.  The consensus was that lending would settle around £26bn-£28bn, representing growth of roughly 30 per cent from last year.

One challenge raised at the debate related to ‘gaming’ buy-to-let, where borrowers aiming to avoid stricter affordability rules under the mortgage market review take out a buy-to-let loan and then live in the property.

Lenders have raised concerns that such attempts to play the system could result in buy-to-let becoming the next self-cert. 

A poll run by Money Marketing’s sister publication Mortgage Strategy showed that out of 392 brokers surveyed, more than 50 per cent have had a client attempt to take out a buy-to-let loan for residential purposes.

As the market grows, is it now time to look again at regulating the sector?

The EU Mortgage Credit Directive, which will introduce its own regulations on the UK housing market over the next two years, would originally have captured buy-to-let mortgages, but the UK mortgage industry successfully argued these should not be regulated in the same way as residential loans.

Buy-to-let experts and lender trade bodies warned that the sector would be stifled if it was covered by the rules, which, say lenders, must take into account affordability when they advance a home loan.  They argued that buy-to-let loans did not need to be assessed for affordability as borrowers used rental income to meet repayments.

Your Mortgage Decisions director Dominik Lipnicki says: “We treat buy-to-let deals exactly as we would a residential mortgage. If everyone operated in that way there would not be this fear of ‘gaming’ buy-to-let. 

“We impose the proper checks all throughout the process, but sadly not everyone does. If firms have nothing to hide and are confident in the way they conduct your business, what is wrong with regulating the market?”

The Buy to Let Business managing director Ying Tan disagrees. He says: “Buy-to-let should not be regulated as it is fundamentally a commercial transaction and regulation in my opinion is to protect the consumer. 

Buy-to-let investors are business people who make educated and informed decisions – it is not something they can simply walk into blindly.”

Tan says there may be scope to regulate the amateur landlord market, but admits it would be hard to define the exact number of properties someone has to own to be classed as amateur or professional.

“A move to regulate the buy-to-let sector would effectively be clamping down on the masses who operate efficiently, fairly and professionally, simply to control the erroneous practices of a minority.”

Separately from the gaming buy-to-let issue, the Paragon debate also touched on the lack of longer-term fixes available for buy-to-let mortgages.

Speaking at the debate, Mortgages for Business managing director David Whittaker highlighted concerns about the proportion of short-term buy-to-let fixes, despite expectations that base rate will rise in the next 12 to 18 months.

Whittaker says: “Around 61 per cent of all buy-to-let mortgages currently are two-year rates and this ratio is not appropriate with interest rates set to rise.”

The Business Mortgage Company chief executive Andy Young says: “There is a balance that needs to be struck between the cost of a mortgage and the security of fixing for a longer term. A lot of landlords seek to keep initial costs down when buying a property so I would imagine that is why two-year fixes are the most common form of buy-to-let mortgage.

“The point here is these are essentially commercial deals, where the investor is educated and aware of their risks. If they decide that two-year fixes are the best option for them – the market will cater to that.”

Lettingfocus.com property consultant David Lawrenson says the ratio of short-term fixed rates is possibly higher than it should be and that he would, under current conditions, look to a five-year fixed rather than two. He says: “If the option is there to secure rates at these current lows for a longer period, that would be the route to go down.”

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