The buy-to-let market has seen a return to growth in the last 18 months as property investors have taken advantage of the soaring house prices and rising rents across the UK. The market is currently boasting a high level of confidence – a completely different picture to what it was just five years ago. As we celebrate our 10th anniversary at Vantage Finance, we’ve been reflecting on how the BTL market has evolved over the last decade.
Before the financial crisis, BTL loans made up a huge part of the finance market due to the high level of product availability and easy access to finance. Loan rates were very competitive and prime BTL rates were similar to residential owner-occupier mortgage rates, making buy-to-let an appealing option for many borrowers. Increased competition in this space meant that vast numbers of lenders were competing for their market share which often resulted in many taking irresponsible risks. Lending criteria was more relaxed and clients varied from professional property investors to first time buyers and subprime borrowers – including a range of borrowers that had no provable income. Furthermore, lenders were lending at high loan to values, regularly at the 90 per cent mark, or above. The rate of growth pre-recession was phenomenal, with a 48 per cent increase in volume and 57 per cent increase in value of BTL loans in 2006 compared to 2005, according to the Council of Mortgage Lenders.
When the crash hit, the impact on the BTL market was instantaneous and lending sharply declined – down from £44.6 billion in 2007 to £8.5 billion in 2009. Many products were pulled and there was considerable volatility around interest rates, creating an unstable lending environment and deterring further investment. Equally, confidence in the market evaporated overnight and the demand for BTL loans diminished - few wanted to invest in an unpredictable market. Some lenders, such as high street banks, continued to offer BTL finance, but there was an extremely limited range available. Added to this, the securitisation market dried up which forced some lenders to stop lending overnight as they no longer had access to funds.
The market hit rock bottom before the demand for BTL loans started to pick up. When the economy began to stabilise, borrowers’ confidence in the market began to grow again. As demand returned, product availability gradually increased and the volume of transactions began to steadily rise.
Since the crash, BTL finance has become more specialist. There are greater barriers to entering the market as tougher criteria has been introduced across the board. Income requirements and property ownership, whether that is a main residence or BTL, are prerequisites. Furthermore, lenders are no longer offering high LTVs – the maximum is around the 85 per cent mark, but most lenders sit at around 75 per cent. The BTL market is now in stable recovery and more products are being launched regularly, but as with most sectors, it’s unlikely that lenders will return to the sometimes reckless lending that we saw pre-crash.
The recovery of the BTL market has been slower than the residential mortgage market, but we have seen the most promising growth in the last 18 months, albeit at a much more gradual rate than pre-recession. Rising house prices has meant that public demand for rental properties has soared – making BTL very attractive amongst investors. BTL lending grew 9 per cent over the month of July this year to £2.4 billion – an increase of 26 per cent from the same time last year, where lending was at £1.9 billion. With market confidence growing, specialist lenders are now offering an increased range of innovative products that are suited to the needs of property professionals.
The future of the BTL market is somewhat uncertain due to potential regulation of the sector as a result of the EU Mortgage Credit Directive, but at the moment, we’re unsure if this is going to happen. We may see partial regulation for ‘accidental landlords’, as regulation is less applicable to sophisticated investors. However, it is unlikely that this approach would be successful and the likely result would be total regulation of the BTL market. Regulation would certainly make it more difficult for new entrants, which in turn would naturally slow the market down. This is the key concern for brokers and lenders as new rules and restrictions will create a much harder environment to deal in. At the moment, the prospect of regulation does not seem to be greatly affecting lender behaviour, and I don’t think it will have a huge impact until it becomes clear how the proposed partial regulation will be implemented. We should continue to see positive growth in the BTL market going into the foreseeable future.
