The rapid growth in popularity of buy-to-let in recent years, fuelled in part by the failings of the pensions industry, has not just fed the stereotype that Brits are uniquely obsessed with property, but it has also provided plenty of business for estate and letting agents up and down the country, not to mention property management companies, conveyancers, mortgage brokers, among others.
The introduction of the 3% levy on stamp duty in April 2016 was expected to sound a death knell for buy-to-let (BTL) property. But the fact is that many investors remain attracted by the high yields in some parts of the country, low void periods and potential for capital growth that BTL offers to be deterred by the introduction of the surcharge.
Instead of steering clear of the market, many private landlords continue to add to their property portfolios, as reflected by the increase in the amount BTL investors borrowed to invest in property last year.
The volume of BTL mortgages increased by 3% last year compared with figures for 2015, according to data released by the Council of Mortgage Lenders (CML).
The total value of BTL loans in 2016 also rose by 7% year-on-year.
But a closer look at the data shows that the BTL sector’s positive lending performance for 2016 as a whole was driven primarily by remortgaging.
“2016 could have been a potentially destabilising year of regulatory and political change, but the mortgage market has been resilient and adaptable,” said Paul Smee, director general of the CML.
Competitive mortgage market
With interest rates at a record low level, competition among mortgage providers, somewhat unsurprisingly, continues to hot up, with lenders shaving percentage points off their buy-to-let mortgage rates in an effort to entice BTL landlords acquiring new properties through their doors.
Figures presented to Estate Agent Today by Moneyfacts reveal that there are currently 1,457 buy-to-let mortgage products available, which is up year-on-year.
“The buy-to-let market is booming. With over 100 more deals available compared to a year ago and the average fixed rate on buy-to-let falling from 3.65% to 3.34% in 12 months, it’s easy to see how lenders have an appetite for new business,” said Rachel Springall, finance expert at Moneyfacts. (Moneyfacts has together a "Best Buys" list to show the range of products available).
According to Mortgages for Business’ latest Buy-to-let Mortgage Product Index, the price of two- and three-year fixed rate buy-to-let mortgage products have dropped to an all-time low, with the average two-year fixed rate having dropped to just 2.92%, while the average three-year mortgage rate is now 3.76%, which partly explains why remortgaging levels in the sector has seen a surge in activity of late.
“Landlords can make considerable savings by switching to a new buy-to-let mortgage deal, with rates hitting new lows borrowers could reduce their regular mortgage payments each month,” Springall added.
Product data analysis from Mortgage Brain shows that the cost of an 80% loan-to-value (LTV) two-year fixed rate deal, for example, is now 18% lower than it was at the start of 2014 and 11% lower than it was a year ago.
Similarly, the lowest rate-three year fixed BTL with an 80% LTV - at 3.39% - is now 16% lower than it was three years ago and 10% lower than last year.
BTL investors favouring longer term deals can also benefit from the savings with Mortgage Brain’s latest figures revealing that the cost of a 60% LTV five year fixed BTL mortgage is now 15% lower than it was in 2014, while its 70% and 80% LTV counterparts are 14% and 11% lower respectively.
But while buy-to-let investors can still take advantage of some decent savings and low rates when compared to this time last year, the mixed and marginal movement in costs over the past three months could be seen as a “sign of stability”, or even the “start of a period of rises”, according to Mark Lofthouse, CEO of Mortgage Brain.
Mortgage Brain’s short term analysis, for instance, show that the cost of a two-year fixed at 60% and 80% LTV, a three-year fixed at 70% LTV and a five-year fixed with a 60% LTV are all down by just 1% compared to November 2016.
By comparison, a marginal 1% increase in cost has been recorded for a two-year tracker BTL mortgage with a 70% LTV, whereas a two-year fixed at 70% LTV, a two-year tracker at 60% LTV and a five year fixed BTL mortgage at 70% and 80% LTV have all remained inactive with mortgage costs remaining static with those offered at the beginning of November 2016.
Lofthouse commented: “Like our recent residential mortgage product analysis the buy-to-let sector looks like it could be levelling out and moving away from the long period of historic lows in terms of costs and rates.”
Buy-to-let mortgage rates were largely unaffected by a sharp increase in swap rates in the final quarter of 2016, but this is unlikely to remain the case in 2017, as higher rates are eventually passed on to buy-to-let landlords, a leading mortgage expert has predicted.
The Q4 2016 results of Mortgages for Business’ Buy to Let Mortgage Costs Index reveals that while swap rates rose strongly in the last quarter of 2016, BTL mortgage headline rates were largely unaffected, due mostly to the Bank of England Base Rate remaining at its record low of 0.25%.
But David Whittaker, chief executive of Mortgages for Business, believes that lenders will have little alternative but to introduce higher BTL rates in the coming months, especially for the growing number of buy-to-let landlords borrowing in a limited company capacity.
He said: “With demand in the buy to let sector already under pressure from both fiscal and regulatory changes it is good to see that lenders have not further burdened landlords by increasing interest rates.
“However, with rising swap rates this situation cannot continue forever and we would expect to see increases at some point in 2017 as lenders factor in the additional time spent on deeper background checks and assessing affordability, particularly from landlords borrowing in a limited company capacity.”
For now, the BTL rates on offer still remain attractive, but with the UK economy remaining remarkably solid and resilient and inflation now at its highest level since June 2014, that could soon change, as the Bank of England may be left with little choice but to increase interest rates, which have been held at a record low of 0.25% since August 2016, sooner than markets currently expect.
The Bank of England raised its forecasts for the UK economy sharply higher in February, increasing the likelihood the next move in interest rates will be up not down.
The Bank used its latest outlook to predict the economy would grow 2% this year and unemployment would be much lower than previously thought.
Presenting the Bank’s forecasts, Governor Mark Carney said that plans for more government spending, stronger world growth and other factors had made policymakers more upbeat about the year ahead. He also conceded the Bank had been too gloomy on the prospects for consumer spending since the Brexit vote.
“Growth has remained resilient since the referendum,” he told the press. “The monetary policy committee expects growth to be stronger over the forecast period than in November.”
Earlier this month, top Bank of England policymaker, Kristin Forbes, suggested that interest rates may need to rise “soon” to keep inflation under control if the UK economy continues its “remarkably solid and stable” performance.
Addressing an audience in Leeds, Forbes said: “In my view, if the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in Bank Rate.”
How much domestically generated inflation will rise and what impact this has on interest rates remains to be seen, but for now a more pressing concern for BTL investors - and mortgage lenders - is the fact that many landlords are now finding it harder to get a mortgage following the Bank of England’s (BoE) decision to enforce stricter lending rules on BTL loans.
BoE’s clampdown on BTL mortgages
As many of you will know, the Bank of England gained powers towards the end of last year to curb any lax lending in the fast growing BTL mortgage sector, an area it identified as posing a potential risk to the financial system, thus making it harder for landlords to get a mortgage.
The Prudential Regulation Authority (PRA), as part of the Bank of England, introduced stress tests in January, forcing mortgage lenders to revise their affordability criteria, as the Bank looked to cool what it perceived to be aggressive buy-to-let lending practices.
Lenders have been forced to raise their income coverage ratio from 125% to typically 145% and apply a 5.5% stress rate to comply with the new PRA standards, effectively banning then from offering loans in cases where rent on properties is not considered high enough in relation to interest charged on the loan, in a move designed to ensure borrowers can repay their mortgages if interest rates increase.
Chancellor Philip Hammond said the changes will help to protect the UK’s economy from instability risks.
He commented: “It is crucial that Britain’s independent regulators have the tools they need to keep our financial system as safe as possible.
“Expanding the number of tools at the [Bank’s] Financial Policy Committee’s disposal will ensure that the buy-to-let sector can continue to make an important contribution to our economy, while allowing the regulator to address any potential risks to financial stability.”
Most lenders expect to see activity levels in the BTL mortgage sector slow, the Bank of England’s latest Credit Conditions Survey shows.
“While availability of secured credit to households is expected to increase slightly over the next few months, this is likely to be moderated in the mortgages market by recent changes to affordability checks by lenders,” said Charles Haresnape, group managing director, mortgages, at Aldermore.
Paragon Bank is among those lenders to have already witnessed a sharp decline in its BTL lending following the introduction of more stringent lending conditions for those making BTL property acquisitions.
The bank agreed mortgages for rental properties worth £185.2m in the final quarter of last year, less than half the £400.9m leant in the first quarter.
Aside from the introduction of tougher stress tests for BTL landlords, the government’s decision to remove tax breaks on buy-to-let mortgages, among other measures, has also had an adverse impact on lending levels in the sector.
Nationwide has also recorded a major drop in buy-to-let lending as government measures to clampdown on landlords start to have an impact on the UK’s biggest building society.
BTL lending at Nationwide plunged to £900m in the nine months to the end of December, from £2.2bn a year earlier, owed largely to the fact that the mutual has had no alternative but to tighten lending criteria in the wake of the stricter tax regime on BTL landlords unveiled by the Bank of England last year.
“We have seen the buy-to-let market cool, to some degree,” said Mark Rennison, Nationwide’s finance director. “It’s a smaller market today than it was a year ago, quite a bit smaller probably in London and the south east. I don’t think it’s a short-term effect.”
Next round of PRA changes
We may be seven months away from the next round of PRA rules coming into play, but landlords – and brokers – are already concerned about the implications they will have when introduced at the end of September as they could dampen the availability of loans to portfolio landlords and push pricing up.
As of 30 September, lenders will be required to carry out tougher checks when portfolio landlords apply for a buy-to-let mortgage, which will involve checking the finances for each of the landlord’s properties, increasing the lender’s workload significantly, which could result in higher costs in the form of rate rises.
The change may also cause the market to slow further, at least in the short-term, as lenders come to terms with the new processes, which includes being extra vigilant while assessing applications from portfolio landlords.
As widely reported, an increasing number of BTL landlords are taking action to mitigate the additional tax costs they will face when tax relief is lowered on mortgage interest payments for individuals from April by turning towards incorporation, and borrowing through a company structure, as finance costs can still be offset against rental income.
To help support investors thinking about buying property via limited companies, more specialist buy-to-let lenders, such as Paragon, Kent Reliance, Shawbrook and Fleet Mortgages, are increasing their support for the limited company BTL market, with borrowing rates in this area of the market falling.
Fleet Mortgages, for instance, has just launched three new limited company products for those borrowers using corporate structures to purchase or remortgage property, with the new products available at up to 65% LTV.
The new products include a pay rate lifetime tracker at 4%, with rent calculated at 125% at 4%; a two-year fix at 3.40% - rent is calculated at 125% at 5%; and a five-year fix at 3.79% with rent again calculated at 125% at 5%.
Bob Young, chief executive officer of Fleet Mortgages, commented: “It is vitally important that advisers look at all the available options for those clients who are going to be impacted by this [changes to the BTL market for lenders].”
But while an increasing number of landlords are undoubtedly turning towards incorporation, and borrowing through a company structure, a limited company clearly does not suit every buy-to-let investor’s investment strategy.
Bridging the gap
The Bank of England’s decision to crack down on buy-to-let lending through the introduction of tighter borrowing rules and stricter affordability tests mean that increasing numbers of landlords are turning to less conventional forms of finance in order to carry on investing in the buy-to-let market.
According to the findings of a recent ‘broker sentiment survey’, conducted by bridging loan lender MTF, 84% of brokers were unable to source a buy-to-let mortgage for some of their clients in the final quarter of last year, with more than a quarter - 27% - attributing affordability as the main barrier.
One in five of the brokers surveyed said they were unable to get buy-to-let mortgages for clients with adverse credit and equally, 20% blamed consumer buy-to-let regulations.
But while buy-to-let lenders deal with the latest interventions by the PRA, business in one often-overlooked corner of the market is currently booming.
Demand for bridging loans - short-term secured loans designed to bridge a temporary cash shortfall when acquiring a property - has surged, as reflected by this latest poll.
The study found that 69% of brokers opted for bridging finance after being unable to raise a buy-to-let mortgage for their clients in instances where time is of the essence. Some 8% of brokers opted for secured loans as an alternative.
Bridging loans were once perceived as a ‘last resort’ lending option. But with a growing number of borrowers attracted to the greater flexibility offered by alternative finance providers, including no minimum term and no exit fees, it is now expanding fast, with 31% of brokers noticing a rise in bridging loan volume in Q4 2016, up from 13% in the previous quarter.
Bridging, known for its speed, offers much faster time to completion than high-street lenders, and so it follows that short-term finance is easily outpacing the mainstream mortgage market, with three-quarters of brokers experienced a rise in overall bridging loan volumes in 2016 compared to 2015, and 69% expecting a further rise in 2017.
Tomer Aboody, director of MTF, commented: “The results from our Q4 survey reflect the adverse impact of stricter affordability and stress testing from mainstream lenders on professional property investors’ ability to obtain buy-to-let mortgages.
“Despite uncertainty in the wider markets, we expect strong demand for bridging loans to continue in 2017.”
Cash is king
A notable trend, in light of tougher mortgage lending conditions, is the fact that the proportion of BTL landlords acquiring property in cash increased sharply in January to the highest level since records began a decade ago, according to Countrywide.
BTL investors who have opted to acquire property since the introduction of the 3% stamp duty surcharge last April have relied more heavily than ever on cash to fund their investments.
Countrywide says that over the last decade, the proportion of landlords purchasing property with 100% cash has steadily increased from 41% of landlords in 2007 to 61% today, and while this is good for transactions it does reduce the number of opportunities agents have to pass mortgage leads on to brokers, reducing the chances of earning some of the highly rewarding referral fees on offer.
Johnny Morris, research director at Countrywide, said: “On average landlords sell a home once every 17 years meaning as prices have increased, a significant amount of wealth has built up in the sector. This is now fuelling cash purchases.
“With the forthcoming tapering of tax relief on mortgage interest payment, landlords have less of an incentive to borrow, suggesting more cash activity in 2017.”
A combination of changes to stamp duty and tax relief as well as mortgage eligibility has certainly made life for buy-to-let investors significantly tougher, with the key indications showing that the level of BTL borrowing will drop this year, and this lower volume is likely to be the new normal with cash remaining king for BTL investors, which is precisely what the Bank of England and government want to see.
Marc Da Silva is Estate Agent Today and Letting Agent Today Features Editor. You can follow him on Twitter @propertyjourno