Blog: Assessing the health of the buy-to-let market

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They believe a combination of squeezed margins due to rising rates and higher taxes, alongside ever-increasing regulation of the sector will drive out many landlords. 

No doubt those are hurdles that the sector must overcome but overall I am upbeat about its  prospects. 

Why? Well, I have spent some time digging through industry data to gauge the true health of the buy-to-let market – and I think the results may come as a nice surprise. 

Rate worries 

There is no denying that the cost of servicing debt is more expensive than it used to be, and as a result some landlords are understandably concerned.  

In some respects, this market reminds me of 2007/08, when lenders were pulling products and repricing upwards on an almost daily basis.  

But the conditions causing that were very different. Fifteen years ago, we were in a full-blown financial crisis, which caused the wholesale markets to effectively close and lenders to go to the wall. 

Now, however, lenders are simply reacting to rising swap rates, which are climbing on the expectation of further rate hikes from the Bank of England. 

But let’s look at the figures and put all of this into context.  

Data from Moneyfacts.co.uk shows the number of products on the market has shrunk 4% to a little more than 2,600 over the past year, while average rates have risen nearly 80 basis points.  

But that only tells part of the story. 

If you look more closely at the data, there are 13.6% fewer sub-60% LTV products on the market a year ago and 4.6% fewer 60-80% LTV deals. Over the same period, the rates on these loans have increased by 123 and 112 basis points, respectively. 

On the surface, that is not exactly a welcome turn of events, but there are two positives I’d like to point toward.  

Firstly, the number of 80-85% LTV products on the market has grown 391% to 59 over the past year, while the rates on these loans have increased just 3bps. That tells me lenders believe there is demand from less experienced landlords with smaller deposits. 

Secondly, we need to put these rate increases in context. Will most borrowers really be paying more?  

Yes, we have seen rock-bottom pricing in recent years, but mortgage rates are largely where they were four or five years ago.  

So, most landlords, especially those who fixed five years ago and are now coming to refinance, will not notice a huge difference. 

For example, looking back through old Keystone product guides, we offered a 75% LTV five-year fixed rate for 3.75% when we started lending in 2018.  

Today, that same deal is being offered for 4.39%, or just 64 basis points more. On a £250,000 loan, it works out at £88 more a month on repayment and £133 on interest-only. 

Record lending 

You won’t believe it from some of stories you read in the national press but buy-to-let lending is actually holding up incredibly well. 

Looking at the first five months of the year, there has been nearly £22bn of lending, according to UK Finance data. That’s 15% more than the same period the year before and is the most since records began in 2014. 

Purchase lending is down around 10% year-on-year, but that is to be expected given property values are sky-high and many landlords are keeping their powder dry while the BoE increases interest rates. 

What is encouraging, though, is that re-mortgage lending is at record levels and up nearly 33% year-on-year, which more than compensates for the tail off in purchase lending. 

When you consider also that there are a record 2 million buy-to-let loans outstanding, that tells me that landlords are not exactly rushing for the exit. 

What does the future hold? 

The question, then, is where does the market go from here?  

Markets expect Base Rate to peak at 3.3% next year, meaning swap rates and mortgage rates will also increase. Incidentally this seems too high to us but we do live in extraordinary times. 

However, those landlords who have already fixed their mortgage costs will be shielded from any further increases in interest rates until they come to re-mortgage in two or, more likely, five years’ time. 

Landlords also face added costs to make sure their properties have an EPC rating of at least a C by the end of 2025 or 2028, while new reforms being introduced will abolish ‘no fault’ evictions. 

Red tape makes life more difficult for landlords – of course it does – but the vast majority of landlords I know and deal with are able to adapt and are in it for the long-term. 

Will some smaller landlords decide enough is enough?  

Perhaps, but the larger landlords who do this for a living will continue to make buy-to-let work, as they have always done. 

So, is buy-to-let dead? The numbers don’t suggest that, and I can’t see that changing any time soon. 

Phil Riches is sales and marketing director at Keystone Property Finance