The Low Down on Buying to Let
Not so long ago buying to let allowed many first time investors to reap rich rewards on the booming UK housing market, but then the economic crisis struck.
Low Down on the Buying to Let BandwagonInvesting in buy-to-let properties was all the rage during the recent UK property boom; suddenly anyone with cash to splash became a property developer. Dazzled by the flashing pound signs of an inflated market, spurred on by a relaxation in buy-to-let mortgages and inspired by TV shows like Channel 4’s ‘Property Ladder’, first time investors decided to jump on the rental property bandwagon.
Whereas some saw the rising house prices as a quick route to big capital gains, the shrewder investors saw buying to let as a worthwhile long term investment. They could lease the property at a rent that would be high enough to cover the cost of the mortgage and other running costs, and then once the mortgage is eventually paid off they’d have a fully paid for property to do what they wanted with.
Buying to Let BoomThe buy-to-let phenomenon first began back in 1996 when the Association of Residential Letting Agents launched buy-to-let loans. Since then the market has soared, reaching a peak in 2005 when 701,900 buy-to-let mortgages were reported outstanding, a growth of 33% on the previous year. In just ten years buy-to-let lending had grown to command around 14% of the mortgage market and the average house price had risen from £66,000 to £180,000.
The fact that the biggest growth occurred in a time when the house price rise experienced a sharp slow down highlights how other factors were responsible for the surge of buy-to-lets than simply the property boom. The other key factors were the lowering of rental cover, the drop in deposit payments and the affordability of buy-to-let loans.
Whereas at one time landlords had to pay out higher interests on their mortgages, the situation changed so that the rates on buy-to-let loans were not much different than those on standard residential mortgages. As further encouragement, they didn’t even need to put a large down payment on a new property; figures released by the Council of Mortgage Lenders (CML) show that in 2000 landlords could only borrow up to 75% of a property’s value, but by 2007 that had risen to as much as 90%.
The lowering of rental cover also had an effect. Previously the rents commanded by landlords needed to total as much as 150% of their mortgage interest payments. The extra amount was intended to cover all the extra charges associated with owning a buy-to-let, such as maintenance costs and letting agents fees. Lenders started to lower this to as little as 100%.
With money so freely available and cheap, it’s no surprise that so many private landlords were drawn into the buy-to-let market. Unfortunately many were oblivious to how vulnerable these financial ‘perks’ would leave them if an economic crisis hit.
Low Down Buying MarketIn 2008, the property bubble burst, with an almighty bang. Its effects were felt keenly on the buy-to-let market; rents couldn’t keep up with the price rises, leaving many landlords tied to mortgage payments larger than their rental income. Furthermore the economic crisis led to a significant increase in lending interest rates. Landlords were flailing.
In June of that year, Bradford & Bingley – the UK’s largest lender to private landlords – announced that the number of landlords that were three or more months behind on their mortgage payments had leapt by more than 52% in the space of three months, to represent over 1.5% of its overall buy-to-let customer base.
The biggest losers were typically those that had jumped onto the buy-to-let bandwagon late, taking advantage of those minimal deposits and high loans available at the time. Many were drawn to the glut city centre new-builds at the top end of the market in flourishing urban areas like Manchester, Birmingham, Leeds and Leicester. The property slump left them unable to rent them out and consequently selling them on cheaply to the highest bidder.
Nevertheless it’s not all bad news for the buy-to-let market. In the in-demand areas, where rents are still rising, the cannier and most fortunate investors are benefiting from a strong rental demand that typically follows a market downturn, a rise in incomes and a fall in capital gains tax.