Many buy-to-let (BTL) professionals are upbeat about prospects for the market following a strong 2021. Experts to whom Mortgage Strategy spoke referred to the good availability of mortgages, loosening criteria and low rates as reasons for their optimistic outlook.
That positivity is despite toughening tax conditions for landlords and the threat of extra costs to improve the energy efficiency of homes, which on the opposite side of the coin have led critics to predict an imminent exodus from the market.
Trinity Financial product and communications director Aaron Strutt says: “More lenders have been easing their criteria to make it more straightforward to get a BTL mortgage. Some providers have been busy removing their minimum income requirements and easing their rental calculations to provide larger loans.
Property is still seen as a reliable way of generating extra income
“The gap between the cheapest BTL mortgages and residential rates is still pretty minimal for those with larger deposits. More landlords would have exited the market had it not been for low rates.
“There are also more small-deposit BTL mortgages available, but they are pretty expensive compared to the best-buy rates.”
Moneyfacts finance expert Eleanor Williams adds: “As rental demand remains high, BTL could be a worthwhile investment as the rise in overall product choice and competitive overall average rates are positive.”
Surge in availability
Data from Moneyfacts shows a huge rise in the availability of BTL products over recent years, with just under 3,500 on offer in late December compared to 1,806 in September 2020 and 2,424 in September 2019.
Typical rates also remain fairly low. The average two-year fixed rate stood at 2.94% just before Christmas, with little movement over the past two and a half years. Of course, that figure is likely to rise if interest rates continue to increase in 2022 to combat soaring inflation, as many expect. However, few think rates will balloon this year.
The low-interest climate means would-be landlords can lock in a competitive mortgage
Those conditions made last year an exceptional period for market growth. Trade body UK Finance estimates there was £18bn of BTL lending for purchases in 2021 — up by a huge 83% on 2020. Many attribute that rise largely to the stamp duty holiday.
The 2021 figure is equally healthy compared to the previous decade. The closest the market got to last year’s total in that period was £16bn for purchase activity in 2015.
Strutt says: “From a new-lending perspective, it was a pretty good year for the BTL sector. The stamp duty holiday brought more life into the market and lending volumes ramped up.
“As a firm, we had a real uplift in applications from borrowers keen to get an investment property, and from experienced landlords adding to their portfolios.”
However, UK Finance expects fewer homes will be bought to let out in 2022, with a predicted drop to £13bn of lending for purchases this year, followed by another fall in 2023 to £12bn.
With younger landlords unlikely to have experienced high interest-rate environments, brokers’ experience and knowledge will be crucial in allaying any concerns
Yet, as £12bn is still in line with lending from 2017 to 2020, the story points more to an extraordinary 2021 than to a gloomy future.
Defying predictions
That narrative is also very different from predictions of an exodus of existing landlords, but many newspapers were filled with such headlines in the second half of 2021.
Those stories often derived from research by major firms that pointed to investors selling en masse. For example, surveys last summer by insurance provider Simply Business and Nottingham Building Society both found about a fifth of landlords planned to sell a property to recoup pandemic losses.
Whether or not that happens, it is clear landlords have not had it easy in recent years. Many have suffered reduced income from tenants who could not pay rent throughout the pandemic, and were unable to acquire much government support themselves.
Some landlords have money set aside to deal with unexpected costs but it may not be enough to also cover energy efficiency improvements
Meanwhile, the ban on evictions during Covid meant landlords could not remove tenants who were unable to make payments. However, that was a key measure to stop people becoming homeless.
This all followed major tax shocks for landlords over recent years. Since April 2020, they have received only basic-rate tax relief, which limits the after-tax income of higher- and top-rate payers.
The stamp duty holiday — which many say was a catalyst for growth last year — ended in September. This will add to buying costs, which some experts have said may deter would-be buyers.
That is in addition to the fact most people buying anything other than their first home must pay stamp duty at 3 percentage points above standard rates.
Environmental requirements
Another concern surrounds the cost of remediation works that landlords may be obliged to undertake to comply with environmental requirements.
The Mortgage Works found 52% of landlords it surveyed in November with properties rated D or below on energy performance certificates were considering selling. This was in response to the need for all new tenancies to have a rating of at least C by the end of 2025, and for all tenancies to do so by 2028.
BTL could be a worthwhile investment as the rise in overall product choice and competitive overall average rates are positive
Those with larger portfolios were more likely to consider selling some or all of their properties that needed extra work, the research also found.
TMW head of lending Daniel Clinton says: “While our research suggests landlords have money set aside to deal with unexpected costs, it may not be enough to also cover energy efficiency improvements.”
However, some lenders are giving landlords access to funding at special rates for such works.
Under TMW’s Green Further Advance mortgage, investors can borrow between £2,500 and £15,000 at a lower interest rate than for standard further advances, as long as all the money is spent on improvements such as installing solar panels, insulation, efficient heating systems or replacement windows.
Soaring remortgages
While green upgrades may prove a challenge for many, UK Finance’s forecasts for remortgaging paint a less worrying picture. It predicts £27bn of such lending in 2022, which is the same as the estimated figure for 2021 and the confirmed number for 2020. For 2023, it forecasts remortgaging to soar to £33bn.
More landlords would have exited the market had it not been for low rates
If that proves correct, any fears of an exodus could be wide of the mark. Remortgage lending is likely to drop only if the market shrinks.
In a BTL report in the second half of last year, Shawbrook Bank identified the move towards sustainability as the next challenge for landlords, as well as the threat of rising interest rates due to economic conditions.
It added: “With younger landlords unlikely to have experienced high interest-rate environments, brokers’ experience and knowledge will be crucial in allaying any concerns.
“Ultimately, confidence in the market remains high among landlords.”
Mixed picture
Trussle head of mortgages Miles Robinson acknowledges the picture of the market is mixed. Nevertheless he is optimistic.
Lenders have been easing their criteria to make it more straightforward to get a BTL mortgage
“It is true that BTLs are not the bargain they once were,” Robinson says.
“However, property is still seen as a safe and reliable way of generating extra income.
“This can be through both rent collection and house price gains.
“In addition, the low-interest climate means would-be landlords can lock in a competitive mortgage.”
