Happy 15th Birthday to Buy to Let Mortgages

Is it really 15 years since the buy to let mortgage revolution started?

 I found this piece below today and thought it was worth sharing with you.   

I'd like to hear from anyone in the mortgage industry about what they think of buy to let mortgages.  A force for good or the harbringer of all our problems?  In my opinion it's a little bit of both.  As a letting agent, we need properties and an influx of buy to let properties brought good quality properties to the market. Unfortunately too many people bought buy to let properties because they read about it in the weekend papers and not because it was a suitable investment for them, and it is these investors who are currently experiencing problems.

"The Paragon Group of Companies has praised the positive contribution buy-to-let has made to the UK housing market as the sector celebrates its fifteenth anniversary this month.

Buy-to-let was officially launched by the Association of Residential Letting Agents on 24 September 1996 at the RAC Club, Pall Mall. The launch was an industry-wide initiative and included several founder lenders, including Paragon Mortgages and Mortgage Trust, and industry bodies, including the Council of Mortgage Lenders.
 

Nigel Terrington, Paragron Group Chief Executive, says:

“Buy-to-let has galvanised the rental market over the past 15 years, whilst providing an attractive asset class for property investors. Buy-to-let finance was the catalyst for the revitalisation of the modern private rented sector.

The flow of fresh capital modernised a tired and decaying sector, driving up standards of accommodation and choice for tenants.

“Many argue that the PRS would have died without buy-to-let; it had fallen to around 7% of all housing by the early nineties and there was a lack of finance going into the sector.

"The PRS now provides a home for nearly one in six households and its importance will increase in future years as population growth and housing completions diverge.

"More people are choosing to live in rented accommodation and we must ensure that they have a PRS that remains fit for purpose. The future strength of the buy-to-let market will be central to that.”

Terrington added:

“The PRS makes a great contribution to the UK economy – it facilitates labour mobility and flexibility, provides an income to thousands of small businesses, supports a number of associated industries, such as letting agents and maintenance companies, oils the wheels of the housing market and makes a great contribution to the public purse.”

The History of Buy to Let Key Statistics

- The value of outstanding buy-to-let balances has risen from £5.4 billion in 1999 (the first year the CML recorded the data) to £154.5 billion today. Buy-to-let represents 12.4% of total mortgage outstanding balances

- Since the beginning of 1999, 2.1 million buy-to-let loans have been advanced and there are currently 1.3 million loans outstanding

- The number of properties in the PRS (in England) has risen from 2.1 million in 1996 to 3.9 million in 2010

- The proportion of households in the PRS (in England) has risen from 10.1% in 1996 to 15.6% in 2010

- The number of homes in the PRS classed as 'decent' by the DCLG rose by 59% in the 10 years following 1996

- The proportion of PRS properties in the lowest two energy efficiency bands fell from 46.7% in 1996 to 19% in 2009

John Heron, Paragon Group Director of Mortgages, was at the buy-to-let launch in 1996. He recalls the conception and growth of the market:

“Buy-to-let was developed in response to the surge in demand for rented property following the recession of the early nineties. The problem was a lack of property supply; there was no finance vehicle specifically designed for people investing in rental property. Their only route was the commercial finance markets and these weren?t suitable.

"ARLA first started talking about the concept in 1995 and, over the course of the next year, we developed the proposal, which was very simple at launch. The maximum loan-to-value was 75% and the rental income had to equate to 150% of the mortgage payment. Though rudimentary, the basic building blocks of buy-to-let lending have not radically changed since launch.

"After launch, it quickly became clear that buy-to-let had a well-defined and needy market and the sector gained ground. Analysis carried out prior to launch identified the need for a much larger private rented sector in the UK, and that the need for buy-to-let mortgages and rented property would grow hand-in-hand.

"Such strong levels of business attracted other lenders to the sector. Competition had some positive benefits for landlords - it resulted in innovation that delivered a wider range of products, whilst criteria also expanded and we saw buy-to-let move beyond its traditional boundaries.

"Largely populated by experienced and professional landlords, it was becoming an "investment product" that more and more first-time property investors would use.

"As the 2000s wore on, the rush for volume on the part of some lenders led to practices that we weren't comfortable with. We were, and remain, vociferous critics of property investment clubs and new build city centre properties in areas of low demand, and we argued buy-to-let was being confused with property speculation.

"This happened at a time when some lenders controls were woefully inadequate – products emerged that had no affordability requirements at all, some lenders required no physical evaluation of the property and rent was not being properly assessed. It was all looking a little overheated.

"Buy-to-let was often cited as helping to cause the credit crunch – nothing could be further from the truth. It was not buy-to-let that contributed to individual lenders? problems; rather substandard lending practices.

"However, as we slowly emerged from the financial crisis it became clear the sector had performed much better than some had predicted. Arrears on buy-to-let proved to be little different than mortgages in general and for some of the more prudent lenders, like Paragon, arrears levels were, and remain, significantly better than market level owner-occupier arrears.

"Today, a new wave of interest in buy-to-let is emerging as lenders look to increase new business levels and improve margins. The mortgage market in 2011 looks very different from the one we had in 2007.

"Not only is gross lending roughly about a third of what it was, specialist markets other than buy-to-let have collapsed. There is little activity in the so called near-prime market and practically zero in self-certification, which in 2007 were substantial niche markets. A lender looking for a high margin, niche market therefore has little option than to enter buy-to-let.

"As for the PRS, as predicted all those years ago, it has gone from strength-to-strength. Housing in the UK today has a greater bias towards private renting than ever. Home ownership and social renting are both in decline and private renting is filling the gap.

"On reflection, I think it unlikely that the PRS could have responded to the shift in demand for more affordable and flexible accommodation without buy-to-let. All the factors that have driven this strong expansion in renting are set to continue and buy-to-let will be there to support landlords who seek to grow their portfolios.

"It will not be without its challenges or problems but I am absolutely confident that Paragon and the lending industry generally are well placed to meet them.”

I know it is quite a long article but I thought it was worth reproducing in full as the Paragon Group were criticised as one of the companies that lent indiscriminently in the buy to let boom and who nearly went under in the 2008 crisis.

So what do you think?

Today's blog question is: Are Buy to Let mortgages the cause of all our financial  problems? I'd love to hear your thoughts...

Peter

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Comments:

No, buy to let mortgages aren't the cause of financial problems. In fact if it wasn't for buy to let mortgages the available stock of private rentable properties would have been severely diminished, pushing up rental rates even more. What was a key issue was lenders offering self-cert mortgage products and lowering their lending criteria, not just with mortgages products but with credit cards and unsecured loans too. Buy to Let mortgages also allow clients who wouldn't have previously been able to become landlords and benefit from increased property values to get on the ladder, assisting their income into retirement, where pensions etc have suffered.Steve Bolt September 21st 2011 13:31:27

Having had friends who around 3 years via self certification managed to get mortgages 10 times their earnings for luxury homes they couldn't afford I'd say that Buy to Let mortgages were not a prime cause for our financial problems... probably quite a few did go out and buy homes to rent out, probably did it on their own without the help of a letting agent and are now paying the price...daz September 21st 2011 13:39:30

Before we knock the buy to let mortgage who remembers what it was like BEFORE they were available?! 2-3-4% over base treated as a commercial loan..you either had to be a cash buyer or have another business to fund the purchase. The arrival of b2l widened the market place and therefore increased the stock of rental houses available and whilst there has been some market abuse if ALL buy to let property were removed where would those tenants be housed? In financial terms 15 years is a short time and my prediction is that the b2l will become a key sector as less and less first time buyers are able to get on the property ladder.Mark Warren September 21st 2011 14:03:52

Good to see my blog get a reaction! I certainly don't think buy to let is the evil that some think, but I've lost count of the times when I met a b2l purchaser who was trying to fit the rent to the mortgage on a property that they liked and not looking for a property that offered a decent return on investment whether it was attractive or not and then look at the financials. Perhaps we should set up a property school oh no we cant as it is already being done!!Peter Ellis September 21st 2011 16:28:10

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