What are the market drivers that makes itan attractive sector for amateur landlords? By Graham Felstead, Head of Corporate Accounts, RBS Intermediary Partners
The buy-to-let sector has undoubtedly been one of the more significant growth stories from the mortgage market over the last few years.
The Council of Mortgage Lenders' (CML) statistics shows that 2007 was another period of growth. Third quarter gross advances were up 5.5% on the previous quarter, representing 12.7% of the mortgage market's total gross advances. And, by the end of third quarter, the total value buy-to-let mortgages stood at £116,100m accounting for 10.0% of the total mortgage market.
As well as sales being a good indicator of the state of the market, the arrears figures also give us a good insight. In quarter three 0.61% of all buy-to-let mortgages were more than three months in arrears compared to the residential market where this figure stood at 1.06% at the end of June 2007.
So what is the outlook for 2008?
It appears that the market drivers are very well established. The demand for buy-to-let properties from students, key workers and immigrants appears healthy.
We are also witnessing a cultural shift in attitudes amongst the 20 and 30-somethings of this country where a great number no longer harbour ambitions to jump onto the property ladder at the earliest opportunity. They prefer instead to rent, as it enables them to live in more desirable areas, such as city centres, which they wouldn't be able to afford if they took the buying option.
Other factors that are contributing to the health of the buy-to-let market include a shortfall in the supply of ‘new builds'; greater demand for single-person homes resulting from divorce; and an increase in people requiring short-term rental because they do contract work during the week in a different geographical location to their family home.
With these factors in mind, it is interesting to look at how this has affected the way the buy-to-let market as evolved.
The so-called ‘amateur' landlord is an area of growth that is particularly interesting. Typically, these people enter the market in a couple of ways. One is where, having lived alone in a smaller property, they move into a new property with a partner but keep on the original property to rent out. Another route is where individuals qualify for a profession such as a lawyer or accountant and their sudden hike in salary means they can afford to keep their original property and buy a new one. The important thing to note is that amateur landlords are not necessarily looking to generate a huge amount of income from their properties. Their main aim is to achieve capital growth from rising house values over a long term period that will eventually supplement their retirement fund or allow them to retire early.
One of the trends that we are observing is the multiple buy-to-let applicant where a group of people club together to start a buy-to-let portfolio. Often the multiple applicants are parents and adult children buying together to build a long term investment portfolio. It may be that we are about to witness the birth of a new phenomenon - the teenage landlord!
The optimism for the buy-to-let market is backed up by recent statistics from the National Landlord Association (NLA) that showed that almost a quarter (23.4%) of landlords plan to expand their property portfolios over the next five years with the current average size of portfolio for NLA members standing at 9.4 properties.
And there seems to be plenty of buying opportunities for landlords. One route is to bid at auction for properties that have been repossessed. CML statistics show that there were 27,000 repossessions in England and Wales in 2007. Although this was lower than expected it is still significantly higher than the 22,400 repossessions seen in 2006. Whether the recent cuts in interest rates ease the affordability issues facing homeowners has yet to be seen but there will certainly be some value buying opportunities for landlords in the current climate.
And, there is now a much greater choice of properties available. In the UK's larger cities the range and diversification of property types is immense. But not all properties are suitable for a buy-to-let mortgage…or so you might think. In fact, working with the knowledge of what you can get a buy-to-let mortgage on could add real value to the conversations you have when advising clients.
For instance, there are many properties that maybe aren't considered suitable. This may include flats above commercial properties such as a shop or take-away; ex-local authority properties; flats that have communal deck access; freehold flats and maisonettes; and short lease properties of 10 years. But, armed with the knowledge that some lenders including NatWest will accept these properties as a buy-to-let, you'll have a head start in this market.
One of the things that might help sustain the growth in the buy-to-let sector is the change to capital gains tax (CGT). From 1 April, landlords will qualify for a flat rate of 18% CGT. This new rate is replacing the taper relief system that meant landlords had to pay CGT at a rate of between 24-40%.
With the buy-to-let market set to become a staple part of a mortgage adviser's diet, now is a great time to really get under the sector's skin and uncover the undoubted business potential it holds.
