The black and white of buy-to-let: What does the data show?
Published: 8 March 2016 | Author: Carla Sateriale
There’s been a lot of buzz around buy-to-let recently. Whether it’s talk of the sector’s recent growth, or the government’s new tax policy changes, or the increasing regulatory interest from the Financial Policy Committee, heated opinions and conflicting projections abound.
For example, the National Landlords Association has projected that landlords may sell off 500,000 properties as confidence plummets.
Conversely, YouGov's recent survey of landlords suggests that many landlords have built a sufficient degree of resilience into their businesses which would allow them to weather the effects of the new tax changes or a possible interest rate increase.
Meanwhile, the BBC neutrally observes: Buy-to-let investors 'could face losses.'
So it is not that easy to get an accurate view of how the buy-to-let sector truly impacts the housing market and the economy as a whole. And with more tenants than ever, all this buy-to-let chatter is unlikely to recede any time soon.
If you’re an avid follower of Twitter or the comments section of the online press, you'll be familiar with the assertions that buy-to-let is simultaneously destabilising the economy and exacerbating the housing affordability crisis. But hard statistics to back up these views are few and far between. Now, thanks to the CML’s buy-to-let mortgage survey, we can analyse trends in the sector based on data from actual transactions. So, how far do some of the common assertions stand up to scrutiny?
Assertion one: Landlords are borrowing as much as they can because it’s cheap to borrow
Fact: Our data show that on average, the loan-to-value ratios of buy-to-let borrowers are comparable to those of residential mortgage borrowers, indicating that high leveraging by landlord investors is no more common than in the residential space. The leveraging profile of buy-to-let borrowers looks particularly conservative when viewed alongside first-time buyers, who on average borrow 78% of the property value, versus 70% of the property value for buy-to-let borrowers.
Chart 1: Average loan-to-value of buy-to-let borrowers, compared with residential mortgage borrowers, 2014-2016
Moreover, recent research from Savills suggests that only 31% of the housing stock in the private rental sector carries a mortgage. So over two-thirds of housing in the private rented sector is not leveraged at all.
Assertion two: Buy-to-let borrowing is all interest-only, which is only sustainable if house prices keep rising
Fact: According to our data, about three-quarters of new buy-to-let loans are issued on interest-only terms. This breakdown varies greatly by regions - in Northern Ireland, only 56% of buy-to-let mortgages are interest-only, while in Scotland it’s about 65%. This suggests investors may be choosing to pay down debt where price growth is less likely to enable them to borrow against the rising value of their property holdings.
Supporting this, data from the 2010 Private Landlords Survey indicates that less than one-quarter of dwellings acquired for use as rental properties rely on capital gains for financial return.
Assertion three: Interest rates are at historic lows – for now. But when rates do rise, buy-to-let borrowers will be forced to sell up or raise rents to cover their mortgage costs
Fact: Lenders don’t want a hike in interest rates to disrupt mortgage repayments, which is why the industry has been factoring that possibility into their assessments of affordability. Our data indicates that, over the past two years, the margin between buy-to-let borrowers’ interest rates and the rates at which they could still cover interest payments (without raising rent) is growing. This means that, when considering buy-to-let mortgage applications, lenders are evaluating whether the prospective landlord could cover interest payments at rates above the prevailing rate of 3.2% (as of end-2015). Increasingly, lenders are linking this “stressed” rate assessment to the applicant’s LTV ratio, which means that more highly-leveraged buy-to-let mortgages are subject to stricter assessments of their vulnerability to interest rate hikes.
What’s more, the vast majority (84%) of new buy-to-let lending is issued at fixed interest rates, and about two-thirds of these are fixed for periods of over two years. The proportion of fixed rate loans with rates fixed for more than three years has gone up from about 10% to 18% since early 2014, reflecting an increasing appetite among buy-to-let borrowers to be insulated from an interest rate hike for a longer period.
Chart 2: Proportion of new buy-to-let lending by interest rate type, 2014-2016
Buy-to-let borrowers tend to opt for fixed rates so that they have greater certainty about the costs of running their businesses. But this also helps to build stability into the sector.
Assertion four: Buy-to-let is mainly growing because there are so many amateur investors looking for a better yield than retail savings and investments. These people are not seasoned landlords, and will be ill-prepared for policy changes or interest rate hikes
Fact: It’s difficult to find data on whether buy-to-let borrowers are experienced landlords. Some attempts to estimate this will use the landlord’s portfolio size as a proxy for the business experience of the landlord. However, this may be misleading, as a landlord with one rental property could be just as “experienced” or “professional” as another with many more properties.
Our transactional data does not provide comprehensive data in this area but, using partial data where this information is provided, we estimate at least 75% of new buy-to-let lending is going to borrowers who already have at least one other buy-to-let mortgaged property with that lender. However, this probably understates the number of multi-property investors, as it takes no account of properties which are either mortgaged with other lenders or not mortgaged at all.
The big picture
Whatever your take is on the sector, the best way to form a judgement is to base it on facts, not hearsay. We hope that, with this article and others to come, we can shine more light on this market, using the data insights we now possess.