The ongoing growth in the buy-to-let market was outlined by the Bank of England recently as one of the potential threats to the UK economy.
The Bank appeared worried that buy-to-let lending now makes up 15% of all mortgage debt and 20% of all new mortgage lending underwritten in quarter one of this year. Despite the Financial Policy Committee stating that there was ‘no immediate case for action in the buy to let mortgage market’, the Chancellor announced yesterday (22nd October) that he has granted a request from the Governor of the Ban for new powers over buy-to-let mortgages.
Martin Wilkinson, founder of Buy2Let.com, a search portal dedicated to the buy-to-let market driven by yield, commented: “Since the buy-to-let sector comprises 1 in 5 households in the UK, it is hardly a great surprise that it makes up 15% of all mortgage debt – there is no real cause for concern or ‘worry’.
The loans are far less risky than traditional owner-occupier loans as they are on a far lower average LTV, and typically have at least 125% rent cover on the repayments. This is also in addition to the borrower having independent income to cover the repayments in the event of an enforced void.
The fact that Buy-to-let makes up 20% of new mortgage lending should not be cause for worry either. Firstly, the Bank of England’s low interest rates means that average buy-to-let yields easily outstrip net returns from other asset classes such as binds, annuities, cash at the moment.
Secondly, last April, Chancellor George Osborne introduced pension reform to provide freedom from ultra-low return annuities, so of course, this has encouraged some of the released pension money to enter the property investment sector – augmented by mortgage finance. The real blow, is that having encouraged this investment in buy-to-let, the Chancellor is now penalising the very same people by making the tax rules more onerous.
“This is not a massive growth in buy-to-let mortgages, but a shrinkage of owner occupier mortgages. Mortgage lenders find buy-to-let mortgages more beneficial, as they typically attract higher fees and margins. Finally, 70% of the Buy-to-Let market is cash, so these new powers are only going to affect a small proportion of the overall market. Of course, if AST’s were registered at the Land Registry at the time of a sale the investment – as is the case with a charge for a mortgage – greater transparency of the market would be available.”