The property market boomed last year, including the buy-to-let (BTL) sector. According to UK Finance, BTL purchase activity increased to £18bn in 2021 — up by a colossal 83% on activity in 2020.
Meanwhile, Shawbrook Bank’s Buy-to-Let Report 2021 found the value of the private rented sector grew by 5.8% in 2021, to £1.4trn.
Shawbrook predicts that increasing landlord confidence, low mortgage rates and rising rental yields will all further boost the sector. The report found that demand from tenants had been growing, with 42% of landlords reporting increased demand for their properties in the past 12 months.
Shawbrook found that two-thirds (67%) of landlords were confident about the future of the property market in 2022, with a third (34%) planning to buy a property in the coming year.
Lenders are competing on price and criteria
MT Finance director Joshua Elash says: “We expect a resurgence in the BTL space after two challenging years.
“Inflation is beginning to bite. It is already resulting in higher wages and will cause rising rents. This, in turn, will bring higher yields back to the sector, which will encourage more investment activity.
“The search for yield has driven much of the activity in the house-in-multiple-occupation [HMO] and multi-unit block [MUB] sectors in the past few years, and this will continue to be a growth area because rising living costs will drive demand for these assets.
“As the country returns to working from offices, we expect an increasing number of tenants to return to the centre of activity. This will drive demand, again particularly in the HMO and MUB sectors of the market.”
Cheap mortgages
Shawbrook’s findings about landlord optimism echo what brokers are seeing in the market. Trinity Financial product and communications director Aaron Strutt says there is still massive demand for BTL, and landlords are as keen as ever to either buy their first property or grow their portfolio.
He says: “Mortgage lenders are competing on price and, increasingly, criteria to attract borrowers, and they are still tempting them with super-cheap rates. So many types of people want to get a BTL because the investment property sector has performed so well over the years.
“Paragon recently highlighted a rise in borrowers in their 60s getting BTLs, while we often get calls from people in their 70s and 80s who are keen to make their cash work harder and get a BTL.
I foresee a further increase in the remortgage sector
“Lots of first-time buyers want an investment property, as well as those who already own their home. Others ask for help to work out what they need to do to build a portfolio. HMOs have grown in popularity because of enhanced rents, and more buyers want holiday lets after demand went through the roof during the pandemic.”
Housing stock issues
However, those investors looking to purchase BTL properties may be frustrated by a lack of stock. According to Propertymark, there were just 20 homes available on average per estate agent branch in November 2021 — the lowest figure in at least 20 years and 50% less than in November 2020.
Your Mortgage Decisions director Dominik Lipnicki says: “While increasing house prices as well as rents are making many look at buying an investment property, the lack of stock will mean a decline in BTL purchases compared to 2021.
Rates through the biggest lenders will have to rise by quite some way before landlords start saying they are expensive
“That said, the market will remain strong, further fuelled by low BTL mortgage rates offered by lenders.”
Those investors who can find a property to buy can be confident of tenant demand. According to Propertymark, the average number of new prospective tenants was the highest on record for the month of November 2021, with 82 tenants per Propertymark member branch — up from 71 in October.
Where to invest
For investors getting involved in BTL for the first time, or expanding their portfolio, they would be well advised to consult Aldermore Bank’s Buy to Let City Tracker to decide on a location in which to invest.
The tracker analyses and assesses five key indicators that have an impact on BTL desirability: average total rent; the best short-term returns through yield; long-term returns through house-price growth over the past decade; the lowest number of vacancies as a proportion of total housing stock; and the percentage of the city population in the rental market.
Given expectations that the base rate will rise further this year, landlords may be keen to lock in sooner for longer
Aldermore’s latest tracker ranks Bristol as the best city in the UK for BTL investment in 2022, with Oxford, Cambridge, Manchester and Luton not far behind.
Busy sectors
Boon Brokers partner Gerard Boon says: “In terms of applications that are likely to thrive in 2022, we saw a significant increase in limited company BTL applications in 2021.
“I believe this is largely due to the tax benefits and competitive interest rate environment for limited company applications. If these mortgage products remain competitive in 2022, I expect demand for such applications to continue to rise.”
Boon continues: “We also expect an increase in demand for properties that have high energy performance certificate [EPC] ratings compared to those that have low EPC ratings. Lenders are starting to promote exclusive products for properties with high EPC ratings.
The lack of stock will mean a decline in BTL purchases compared to 2021
“Most notably, NatWest offers ‘green’ mortgage products with lower interest rates than for those in its core range.
“Also, as regulation is set to favour the building of high-EPC properties, we expect demand for lower-EPC properties to continue to fall in both the residential and BTL markets.”
Will landlords look to remortgage?
The Bank of England has already raised interest rates once in recent months, with the bank’s Monetary Policy Committee upping the base rate from the record low of 0.1% to 0.25% in December 2021.
Some experts expect more increases in the base rate to tackle surging inflation that hit 5.4% in December.
Others say rising interest rates are likely to prompt a surge in remortgaging as landlords look to protect their profits from higher mortgage costs.
Lots of first-time buyers want an investment property, as well as those who already own their home
SPF Private Clients chief executive Mark Harris says: “Remortgaging will be a key area for landlords in 2022. There is an estimated £60bn-worth of BTL mortgages that are due to mature this year.
“Back in January 2017, the Prudential Regulation Authority introduced new underwriting standards. There is no coincidence that, around that time and subsequently, the level of five-year fixes taken out has grown significantly. “
Harris adds: “Given expectations that the base rate will rise further this year, landlords may be keen to lock in sooner for longer.”
Lipnicki says: “The desire to purchase remains as strong as ever but the sheer lack of stock will limit that side of the market.
“I foresee a further increase in the remortgage sector as borrowers scramble to secure a great fixed deal and utilise the lower loan-to-value due to their property price increasing, often substantially since their last remortgage.”
Experts also say that rising interest rates are unlikely to put off potential investors from purchasing more BTL properties, with rates still low by historical standards.
We expect a resurgence in the BTL space after two challenging years
Strutt says: “Rates through the biggest lenders will have to rise by quite some way before landlords start saying they are expensive.
“Birmingham Midshires has a 1.21% two-year fix or a 1.59% five-year fix. Buy-to-let mortgages are artificially low now, and landlords who have been around for a long time know how much of a bargain they are. The gap between the cheapest residential and BTL mortgages is still marginal and getting smaller.
“More lenders have been increasing their LTVs so landlords don’t need to put down such big deposits, and they are coming up with options to get around the increasingly tight rents.”
