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rental demand rises, buy-to-let mortgages fall

Buy-to-let investors are facing a harder time obtaining mortgages - despite signs that income from property rentals is rising, as more would-be first time buyers opt to rent instead.

According to financial information specialists Moneyfacts, some 85% of buy-to-let mortgages have been withdrawn in the last year. In just one day - Monday 29 September - 181 buy-to-let mortgage products were taken off the market.

Michelle Slade, analyst at Moneyfacts.co.uk, says that while there has been a general reduction in the availability of mortgages, this has been most prevalent in the buy-to-let market. "The buy-to-let sector has been hardest hit since the turmoil began with 85% of products being withdrawn in a year, but residential mortgages are not far behind with a loss of 60% of products," she says. The buy-to-let market has been badly affected by the crisis at two of the largest specialist lenders, Northern Rock and Bradford & Bingley.

According to figures published by the Council for Mortgage Lenders in August, there was an 18% drop in buy-to-let lending in the first half of 2008 - falling to 144,600 new buy-to-let loans, from 176,500 in the second half of last year. But this was a significantly smaller fall in borrowing than in the wider mortgage market - where there was a 28% fall in remortgaging and house purchase lending.

Overall, buy-to-let mortgages are becoming an increasingly important part of the UK property market. There are now 1,103,000 buy-to-let mortgages in the UK, owing £132.5 bn. Buy-to-let mortgages represent 9% of the total number of UK mortgages outstanding and 11% of the value of mortgage stock. Growth in the buy-to-let market was particularly strong when house price increases were also at their peak. There was a 48% rise in the number of buy-to-let mortgages in 2006, with a 57% increase in the amount loaned on buy-to-let.

Michael Coogan, director general of the CML, predicted when its half-year figures were announced that demand in the rental market would remain strong, with more people forced to remain or move into the rental market, because of difficulties in financing home loans.

This interpretation of events has been reinforced by the findings of a survey of its members by the Intermediary Mortgage Lenders Association (IMLA). Peter Williams, IMLA's executive director, says: "Many customers are feeling a considerable amount of pain through the lack of availability of mortgage products. Either they are paying more for their existing loan, or they are being kept out of the housing market and renting instead. Not surprisingly, buy-to-let remains fairly buoyant as the private rented sector responds to growing demand from tenants."

According to the Association of Residential Lettings Agents (ARLA), there are attractive opportunities to enter the buy-to-let market at present, with property prices falling and more homes lying empty. Four out of ten existing buy-to-let landlords questioned by ARLA intend to make use of current market conditions to increase their portfolio holdings. Three quarters of those surveyed do not intend to sell as a reaction to falling property values.

Ian Potter, ARLA's head of operations, says: "Before the credit crunch, ARLA was forecasting sustained growth in the rental market, driven by a variety of domestic demographic factors. It is very clear that without the support of the buy-to-let investor, the sector would be seeing some very serious shortfalls in the supply of housing to rent in some areas given the downturn in the housing market."

ARLA says that the arrival of large numbers of migrant workers from Poland and other European Union new member states helped to boost rental demand for buy-to-let properties.

  • 07 October 2008
    by Paul Gosling