The buy-to-let mortgage has been around for 10 years as of this summer. Mortgage Express, which is part of the Bradford & Bingley group, was the first to try out a dedicated buy-to-let mortgage product in July 1996. It now has about 20% of the market share.
Buy-to-let mortgages came about when the Housing Act was changed to give landlords more power to get rid of tenants who weren't paying their rent. The Association of Residential Letting Agents (ARLA) started offering these loans through a group of lenders in September 1996. This was the beginning of the buy-to-let mortgage in the UK property market.
Lenders are relaxing their requirements because they now know that buy-to-let is not as risky as they first thought. About 70 lenders now offer the buy-to-let product, but about half of all buy-to-let loans are written by the six members of the ARLA panel: Paragon, GMAC, Mortgage Express, Birmingham Midshires, NatWest, and The Mortgage Business.
A risk analysis of both buy-to-let and residential loans shows that residential loans are riskier. The latest numbers from the Council of Mortgage Lenders showed that 0.68 percent of buy-to-let mortgages had been in arrears for more than three months, compared to 0.97 percent of normal loans.
Because of rising home prices and a growing population, more people are renting for longer periods of time. This is making the need for rental property grow. Amateur and first-time landlords who have had success with their first one or two properties now have the confidence to add more properties to their portfolios.
In the last ten years, the sector has grown very quickly, and it now makes up about 8% of all the homes in the UK. The first mortgage deals were rigid, business-like products with high-interest rates (up to 4% over the Bank of England base rate) and low loan-to-value ratios (up to 75% of the value of the home). In the past, the rent cover had to be equal to 130% of the mortgage. This was done to protect both the lender and the landlord from vacancies and the higher risk.
The average loan-to-value ratio for landlords is now 85%, and rent now covers an average of 125% of the mortgage payment. Even though 90% of people can get loans and 100% of people can pay their rent.
Recent research showed that 83% of landlords plan to add to or keep the number of properties they own in the next six months. This shows that people still want to invest. This year, the average number of properties owned by a landlord is seven, up from three in 1996.
Buy-to-let lending has grown from GBP3.1 billion in 1999 to GBP24.5 billion in 2005. The market itself is worth over GBP73 billion and is still growing. Because of how unstable world stock markets are and how bad the pensions crisis is, more and more investors are turning to real estate to protect their future.
Even though the number of students, single people, and immigrants will continue to grow, the number of rented homes is only expected to grow by about 3% over the next ten years. The downside is that first-time buyers often have to compete with buy-to-let investors for the same properties. Even though the government says it will help, the growth of the buy-to-let market could mean the end of the first-time buyer.
With property prices going up and rental income going down, First Mortgage Trust has made a buy-to-let rental calculator that takes some of the guesswork out of the beginning of the process.
