Buy-to-let

Last updated 03/11/2010: any recent updates in this colour.

This page contains information of the following:

Origins of buy-to-let

The buy-to-let mortgage was first launched in 1996 when a group of lenders and the Association of Residential Letting Agents (ARLA) recognised that a growing number of individuals were interested in buying property to let out and that the mortgage products available to them did not meet their needs or properly reflect the relatively low risks compared to many other business ventures.

Prior to that, landlords had to approach banks or finance companies that offered loans to landlords on a similar basis to other lending to small businesses, typically requiring a 50% deposit and charging a higher rate of interest.

The first buy-to-let lenders recognised that lending to landlords was fundamentally different, and in fact, lower risk than lending to small businesses secured on the businessman’s home. So buy-to-let lenders offered mortgages on terms that, although not as good as those available to owner-occupiers, were closer to an ordinary residential mortgage than a typical business loan.

A maturing buy-to-let mortgage market

Over the following decade buy-to-let captured the popular imagination so that by the end of 2006 there were 840,000 buy-to-let mortgages outstanding with a total balance of £93.2bn. Growth has continued since then, so that by the end of 2009 there were 1.2mn buy-to-let mortgages with an aggregate balance of £145.3bn.

The rate of growth has slowed as the market has matured. In part this reflects the fact that, as buy-to-let loans typically offer better terms than commercial finance, many investors switched their existing borrowings in the earlier years of buy-to-let.

But during the period 2007-9 the financial crisis also had a severe impact on the buy-to-let mortgage market. Wholesale funded buy-to-let lenders such as Paragon Mortgages were unable to raise new funds to lend while other major lenders were also constrained by the general shortage of funding. This, and the broader recession, led to a sharp decline in gross lending - down from £44.6bn in 2007 to £8.5bn in 2009 - and in net lending which fell from £27.4bn to £7.5bn over this period.

But despite this reduction in the flow of new business, the outstanding stock of buy-to-let mortgage debt has continued to grow and buy-to-let contributed 65% of total net mortgage lending in 2009.

The private rented sector (PRS) transformed

The buy-to-let mortgage market has facilitated something approaching £200bn of new investment in the PRS. Since 1996 the PRS has increased in size from 2.4mn dwellings to 3.3mn. Buy-to-let has also helped to drive an equally important improvement in the quality of the privately rented housing stock with the English Housing Survey 2008-9 showing a steady reduction in the percentage of privately rented homes failing to meet the government's decency standard.

No doubt in part thanks to this quality improvement, the latest data from the English Housing Survey shows that 83% of private tenants were either satisfied or very satisfied with their accommodation, higher than in the social rented sector.

Policy environment

Whilst the availability of buy-to-let mortgages has played a crucial role in enabling the PRS to expand, the re-emergence of a vibrant PRS was also underpinned by the changes brought about by the 1988 Housing Act. This act established a new form of tenancy agreement, the assured shorthold tenancy (AST) which has allowed rents to be set at market rates and has given landlords greater confidence that they could gain vacant possession of their properties at the end of a tenancy. This act of deregulation has served both landlords and tenants well and policymakers should be mindful of the detrimental effect of excessive regulation.

Buy-to-let mortgage regulation

In December 2009, the Treasury published Mortgage regulation: a consultation. It proposed that buy-to-let mortgages should be regulated by the FSA. In our response we stated that we were unconvinced by the arguments Treasury had put forward for regulating buy-to-let mortgage transactions through conduct of business rules. We said that we did not believe that FSA regulation of the mortgage decision would mitigate the risks of market failure, which stemmed more from the investment decision than the mortgage.

On 26 March 2010 Treasury published Mortgage regulation: summary of responses announcing that it would reconsider changes to the form of regulation proposed to protect consumers in the buy-to-let sector.

The paper said 'The Government will examine how to ensure the impact of regulation on the buy-to-let market is proportionate, particularly for individual professional landlords. It will also consider how best to protect consumers from the range of possible causes of detriment that may result from buy-to-let including, if appropriate, the consequences of poor investment decisions as well as unaffordable borrowing'.

Subsequently, the coalition government has indicated that if industry did more to provide information for landlords it may not feel the need to introduce regulation of buy-to-let mortgages. In response the CML has held discussions with the National Landlords Association (NLA) and others about how the industry can provide more information to help landlords.

Sale and rent back

Sale and rent back schemes enable homeowners facing financial difficulties to remain in their homes by becoming tenants. There was evidence of significant consumer detriment in this market, which grew rapidly in 2007 and 2008, as some homeowners were told they would be able to stay in their homes indefinitely only to find that they were on an AST with no security of tenure beyond the 12 month term of the tenancy.

The CML called for regulation to be introduced and, following a Treasury consultation, on 1 July 2009 the FSA implemented an interim regulatory regime. The full regulatory regime commenced on 30 June 2010. All sale and rent back providers are required to register with the FSA and meet strict rules governing advertising etc.

Tenant protection legislation

In April 2010 The Mortgage Repossessions (Tenant Protection) Act 2010 was introduced to provide protection to a tenant where the tenancy has been granted without the consent of the borrower/landlord's mortgagee. At present such tenants (known as unauthorised tenants) have few rights. A statutory instrument will determine the date the act comes into effect.

This act will only apply to buy-to-let mortgages where a landlord has let a property in breach of the mortgage conditions, for example where these require use of an AST and the tenancy is not an AST.

Further information can be found on the relevant CML circular.

The Rugg Review

In 2007 CLG commissioned Dr Julie Rugg of the University of York’s Centre for Housing Policy to undertake a study of the PRS to improve understanding of the sector, consider what barriers exist in ensuring the sector consistently offers a fit for purpose product, what role it will have in the future and what actions could be taken to influence and support that role.

In October 2008 the final Rugg review The Private rented sector: its contribution and potential was released. It was widely welcomed for putting forward evidenced based recommendations in a sector that had previously often seen policy driven by political demands before the facts were properly ascertained. For example, the review questioned the assumption made by some that small landlords were necessarily less professional than larger ones, as it is not supported by the available evidence.

The review also questioned the effectiveness of regulation as a tool to control the development of the PRS where those regulations were seeking to prevent changes that were naturally occurring, stating that 'policy interventions should flow with the market rather than seek to change its essential characteristics.'

Government response to the Rugg Review

On 3 February 2010 the Department of Communities and Local Government (DCLG) published The private rented sector: professionalism and quality – consultation
Summary of responses and next steps. This included the following proposals:

a new housing hotline offering free help and advice for private tenants
a 'tripadvisor' style word-of-mouth website comparing landlords
a requirement for written tenancy agreements in all tenancies
a National Register for Landlords to help tenants make basic checks on their prospective landlords
better regulation of letting and managing agents

The coalition government has subsequently announced that it has no plans to implement any of these proposals. The CML welcomes this decision although we do still support the regulation of letting agents and the requirement that all tenancies are written.

Treasury Consultation: Investment in the UK private rented sector

In February 2010, the Treasury published the consultation Investment in the UK private rented sector. The CML in conjunction with the British Property Federation (BPF), the Royal Institution of Chartered Surveyors (RICS) and others submitted a joint response.

Treasury in turn responded with the Government response to the
consultation on investment in the private rented sector in September 2010. We broadly agreed with the government's conclusion that institutional investment in the PRS is likely to remain niche and small scale given the low income returns available. The government rejected a number of proposed changes to the tax regime that would have benefited institutional investors but did state that it will carry out further work looking at the barriers to the use of real estate investment trusts (REITs) investing in residential property.

CML vision for the PRS

The CML supports a well regulated PRS with a diverse range of providers capable of meeting the varied demands of tenants. Based on demographic trends (for example more student and migrant workers), constraints on housing affordability and on the growing demand for flexible accommodation from a mobile workforce, we believe that the PRS is likely to continue to grow.

To satisfy this expanding tenant demand landlords will have to make a substantial investment in the sector. We believe that buy-to-let borrowers will continue to play a crucial role in provided much of that required investment. We are therefore concerned that regulation does not impose unnecessary administrative and cost burdens on buy-to-let landlords many of whom operate on a modest scale with limited resources.