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Will pension freedoms spark buy-to-let boom?

Brokers say improving market conditions, regulatory shifts and new pension freedoms have combined to make the buy-to-let sector the most attractive lending proposition in 2015.

A string of new entrants have either already joined the UK buy-to-let market in recent months or are planning to do so in the coming months. State Bank of India, which rejoined the sector last year after an 18-month absence, started to distribute through the broker channel last month and fellow Indian-based lender Axis Bank is rumoured to be weeks away from its own launch.

New specialist buy-to-let lender Foundation Home Loans is also close to launching into the market and Council of Mortgage Lenders data shows it is a market in the midst of a resurgence. Since 2009, the market has grown each year up to 2013, when a total of £20.7bn was advanced to landlords.

MMR slowdown

Tighter regulations placed on residential lending by the Mortgage Market Review have squeezed lenders’ margins, forcing them to consider other sources of revenue such as buy-to-let.

The new regulations were blamed for a dip in mortgage approvals over the summer, while British Bankers’ Association figures published in December showed year-on-year lending by the UK’s six largest lenders fell 12 per cent to £10bn.

Mortgages for Business managing director David Whittaker says: “Lenders who are struggling to match their ambitions with the state of the residential market will be looking to the buy-to-let space to make up for a lull in volumes.”

He adds that greater margins in buy-to-let lending will make it a more attractive market to new entrants.

“Any new lender at the moment will also be focused on buy-to-let quite simply because the returns are greater,” he says.

“If you look at the treatment of buy-to-let loans on a lender’s balance sheet, it is the same risk capital as residential loans but pays a higher percentage and bigger fees, without the regulatory overtones.”

TBMC managing director Andy Young says: “If lenders have been hit in terms of what they can do in the residential side of the market, they will naturally look to buy-to-let, which has really come on in recent years.

”Arrears are down, margins are good and there is an appetite to lend, so anyone new looking to lend in the UK would probably see landlords as their best bet.”


A boon from the pensions reforms?

The pension freedoms announced in Chancellor George Osborne’s Budget last year are another potential gift for the buy-to-let market. Following the announcement that anyone aged 55 or over would be able to access their entire pension pot from April 2015, experts forecast a boom in buy-to-let investment.

Buy to Let Club managing director Ying Tan believes the changes are likely to provide a boost for the market but says pension holders may not have the required risk appetite for investing in property.

He says: “The pension freedoms set to come in will help of course, but I wonder if most pension pots are big enough to buy a property and whether people who have saved into a pension have the kind of risk appetite to take on an investment property.”

However, a Bank of Ireland study in November found that 29 per cent of retirees nationwide were planning to use their pension to buy property.

John Charcol senior technical manager Ray Boulger says: “There is a definite logic to savers using their pensions windfall to invest in property. House prices will continue to rise despite the efforts to boost supply, and I think those who are smart enough to save a decent amount over their careers will also see the sense in property investment to gain better yields.”

A cleaner market?

The buy-to-let market has largely “cleaned” itself in the years following the crisis, says Tan, making it a better proposition for lenders. The credit scoring process, in particular, has improved, leading to falling arrears in the buy-to-let market. CML data shows the percentage of buy-to-let loans in three months or more arrears has fallen from 2.31 in 2008 to 0.92 per cent as of 2013.

Tan says: “I’ve been in the market through good and bad times and right now buy-to-let is as strong and as clean as it has ever been, so it makes perfect sense to see lenders joining the market now.

“If margins are best in buy-to-let and arrears levels are low, why wouldn’t you want to get into that market? Often you think if margins are higher than its riskier but if both margins and arrears are favourable, it’s a great time to enter.”



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There are 3 comments at the moment, we would love to hear your opinion too.

  1. I always think it interesting that property is the one asset class people are actively encouraged to ‘gear up’ to invest in.

    I’ve seen miselling cases where people have geared up their homes to invest in other assets but for some reason taking debt on to invest in a property is not looked at in the same way.

    The pretence would appear to be that property is a one way street – cover your interest from rent and you’re fine – but looking back to the late 1980’s this is clearly not the case.

    I’m no expert in the mortgage market but it concerns me that there is seemingly less regulation involved in someone releasing their pension, gearing up on debt to buy a property, the transaction of selling the property to the budding ‘landlord’ and all of the fees and costs associated in this and the subsequent letting of a property than there is investing £100 per month into a pension.

  2. Given that BTL purchases are subject to a significantly larger deposit than those for personal occupation and that the size of the average pension fund seems to be barely more than £30,000, it is a point of some concern that many people may well encash the lot to take on a large mortgage quite late in life, in the optimistic belief that BTL investment is a guaranteed winner. Over the years, I’ve encountered as many people who’ve had bad (and costly) experiences with BTL as those for whom it’s worked out well. A fair few people, with disastrous results, have tried it with the purchase of a their own home, on the basis that they’d ride the endless boom and later downsize with a tidy tax free profit. There’s a risk that, for one reason or another, it just doesn’t turn out that way and they end up with an unhappy debt and a seriously inadequate pension fund

    I still hold to the view that these new pension fund access freedoms are going to be a Pandora’s box of woes and that it would have been much more responsible on the part of the Treasury to limit access to 7½% p.a.

  3. I agree with Julian’s first para, but not with his second although the freedoms are too much freedom as a combination of a higher triviality limit (3 or 4 x LTA) and a lower secure income requirement for flexible drawdown (the £12k) would have been sufficient a change for my mind.

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