The Buy to Let Market

With steady rises in house prices, property has become a sound investment for many over the last few years. The buy to let market in particular has flourished as investors not only realise the long term potential of property but with the average age of the first time buyer calculated at 35, the rental market is also booming.

Garry Smith, Director of Worcestershire based Century 2000 looks at the buy to let market and how interest only mortgages have enabled more people to benefit from property investments.

Twenty years ago interest only mortgages was a term that didn’t exist. To many the mere concept seemed completely at odds with the traditional method of borrowing money to purchase property; repaying the capital along with interest over an extended period of time.

Yet today approximately 24% of all new mortgages are lent on an interest only basis, this being a mortgage where only the interest is paid each month and the actual amount owed remains the same throughout the term of the mortgage.

In fact, the interest only mortgage is not a new phenomenon at all. They’ve been around for years but they were usually referred to by the name of the investments that were put in place to repay them at the end of the agreed term: an ISA Mortgage, Pension Mortgage and, of course, the discredited Endowment Mortgage. It’s only now following disappointing performances from a significant number of these investments that they’re being recognised as two individual components – an interest only mortgage and an investment, with the means to pay the mortgage at maturity.

Rapidly rising house prices have been the main driving force behind the interest only mortgage explosion. Often without any consideration as to how they might be repaid in the future.

For those hungry to get their first foot on the property ladder interest only has been the only affordable route. But it’s not without its drawbacks.

Recent research by the industry regulator suggested that a considerable number of new borrowers had weak or even non-existent repayment strategies, symptomatic of our enjoy it now, pay for it later credit culture. It’s clearly a cause for some concern, particularly in instances where the borrower hasn’t fully understood the nature of the agreement into which they’ve entered.

Equally there are vast numbers of borrowers that have derived substantial benefits from this method of funding and built significant amounts of personal equity using this strategy. Most commonly by using them to great effect within the booming rental market. The success of Buy To Lets (5-6% of UK households live in BTL’s) means lenders are willing to offer increasingly aggressive financing packages – as much as 90% LTV (loan to value) is now commonly available.

Most Buy To Let mortgages are lent on an interest only basis and, as the lender’s affordability criteria is crucially based on how much rental income a property achieves, rather than how much earned income the owner generates, many have spotted the opportunity and run with it.

Let’s take the fictional Mr H. In 1998 he bought a rental property using a small amount of savings, paying just the interest on the money borrowed meant that his monthly mortgage payment was more than covered by the rental income. Rising house prices during the subsequent years meant that he was able to remortgage his original Buy To Let property and raise the deposit to buy another one. He has continued to repeat this process fourteen times and has seen his personal equity grow to 1.12 million using very little of his own cash and, someone else (the tenants) have paid the interest on the money that he borrowed.

This is not an unusual story but have we reached a point where it’s too late for new investors to take advantage of this same strategy? It would be prudent to assume that house price inflation will slow down compared with the heady times of the five year period following the late 90s. But, even allowing for peaks and troughs and the market’s cyclical nature, property has consistently performed in the long term so for those adopting a five to 15 year view the door would still appear to be well and truly open.

Happy Birthday Buy To Let

• Buy To Let as we know it celebrated its 10th Birthday last year.
• Buy To Let was the phrase adopted by the Association Of Residential Letting Agents (ARLA), the professional body for residential letting agents, in consortium with several mortgage lenders to launch a new innovative mortgage product. The catchy phrase has stuck.
• Until 1996 it was notoriously difficult to regain possession of a tenanted property leading to a reluctance from Mortgage providers to lend to private landlords. With the introduction of the modern Assured Shorthold Tenancy – typically a 6 or 12 months tenancy agreement – the whole process of regaining possession was simplified which led to an explosion in the growth of the privately owned rental sector.
• Buy To Let contributes over £30 billion to the UK economy annually.

This article was written for The Birmingham Post’s Wealth supplement in June 2007.