Only a few years ago, Buy to Let was the most booming part of the property market, and was the sector that every lender and every broker wanted to be involved with. Anyone who has observed changes in the BTL sector over the last few years could be forgiven for thinking that it is now strongly out of favour and potentially doomed. Some brokers might even think their time is better spent developing expertise in other, more certain to prosper sectors.
The last couple of years have certainly seen frequent changes, all of which have the potential to reduce demand from investors and in turn, lead to a lower level of borrowing appetite. The phased alterations to tax relief on mortgage interest, the increase in stamp duty, and the PRA changes to underwriting rules are all likely to make life more expensive and/or harder for investors. Further, legislative changes aimed at making homes safer and more efficient are likely to lead to an increase in costs and effort for landlords, and the proposed changes to letting fees could well also increase landlord costs. The direction of travel towards a more highly regulated sector seems clear, and many would add that this is a good outcome.
A reading of headlines in the press at first glance appears to confirm some of the challenges. One particularly eye-catching recent headline suggested that 20% of landlords are planning to sell-up in 2018, which would be a game-changer for the sector if it occurred. Of course, dramatic news has always sold papers, and a reading of the article suggests that the research was undertaken by a landlord trade body, which of course has a duty to its members to seek to minimise those things which could work against their interests. Nevertheless, you don’t have to read for long before you encounter headlines which suggests that the sector is on a knife-edge.
In and amongst the challenging headlines, there are indicators which suggest that the sector is rather healthier than would perhaps be imagined. There is a steady flow of news from lenders which suggests that they are continuing to enjoy good volumes of lending and are adapting to the changes. Just this week there has been healthy discussion in the trade press about the desirability of getting rid of the requirement for floating charges on limited company lending, following the decision by Paragon to remove this requirement. Limited Company lending continues to grow rapidly, and Paragon is a significant player in this market, so this is big news.
Another adaptation has been that we are seeing the beginnings of lenders moving beyond a formulaic approach to income coverage ratios (ICRs). As with when the Mortgage Market Review was introduced in 2014, lenders tend to initially apply the rules in a literal manner. Then, over time, their approach evolves, and they find a more holistic approach which better meets consumer needs and their own lending appetite, as well as still meeting the rules. At Furness, we have always lent against an assessment of affordability rather than against an ICR formula, and we are proud to be one of the lenders now at the forefront of this new wave of development.
The industry has also of course found itself lending on longer term fixed rates to work within the new rules whilst assisting borrowers with maximising their affordability. For many borrowers this is an ideal outcome as it matches certainty of payment over a reasonable time-frame against a likelihood of limited growth in rental income over that same time-frame. A key challenge for the industry in 2018 though might be to find ways of applying the rules in a way which better serves those for whom a 5-year fixed rate isn’t the right option. The regulator has already intimated that there could be concern if sales of longer term fixes continue to rise, and it would appear to be likely that there is a tension between a borrower’s need for maximum borrowing and their other needs. The industry needs to find a way to address this issue, and assessment against affordability could well be part of the solution.
It is self-evident that the sector has ongoing challenges, but the fact that new entrants continue to focus on this sector suggests that they are confident that it will thrive, and innovation continues to make this sector an interesting and dynamic one. Further, despite a clear focus from government on house-building, it is going to be a long time before the supply of housing meets the demand. In the meantime, there would appear to be an ongoing need for Buy to Let which will continue, regardless of the short-term noise. Buy to let is not dead, and will continue to thrive.