UK Buy-to-let Mortgages 2008

The UK buy-to-let mortgage market has come to a crossroads. After a decade of strength growth the credit crunch has severely impacted on the market. This report looks at how both competitors and landlords are coping during difficult times. It concludes with a consideration of where the UK buy-to-let market can go from here.

Report Highlights
Many investors were attracted by the buy-to-let market because of the indefinite high returns that it promised while the housing market seemed destined to grow indefinitely; a view that was encouraged by the loose lending policy of the banks. However, the UK property market is now on its way to a severe downturn.

A few reasons could account for the fact that arrears are likely to be increasing more quickly in the buy-to-let mortgage market than in the wider market. For instance, falling rents due to the oversupply of property in some areas has seen landlords experiencing difficulty in gathering sufficient rent to cover their borrowing obligations.

One likely outcome of the credit crunch is heavier regulation, especially as this is something that the FSA has been hinting at. Regulation in the buy-to-let market has been minimal, which is a factor in the impressive growth seen in the market over the past decade.
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Table of figures 7
Table of tables 8
Market Context 9
The buy-to-let market saw rapid growth between 1996 and 2007 9
Mortgages outstanding in the buy-to-let mortgage market increased greatly between 1996 and 2007 9
Buy-to-let growth slowed in 2007, despite record lending 9
The effects of the credit crunch can be seen when comparing H1 2007, H2 2007 and H1 2008 10
The credit crunch has had a large adverse effect on the UK housing market, including buy-to-let 11
The liquidity squeeze is taking its toll on the UK buy-to-let mortgage market 11
Since the beginning of 2008, house prices have continued to fall across the UK 12
Tenant demand has soared but unsold properties are keeping rent in check 13
Difficult market conditions have seen buy-to-let arrears and repossessions surpass the overall market 14
The percentage of buy-to-let mortgages in arrears has risen by 0.15 percentage points over the past year 14
Arrears have risen in the buy-to-let market at a quicker rate than the total mortgage market 15
The percentage of buy-to-let properties repossessed in H1 2008 was in line with that of the total mortgage market 15
The percentage of properties in possession of the lender at the end of H1 2008 is higher for buy-to-let than the wider market 16
Arrears and repossessions are growing faster in the buy-to-let mortgage market than in the wider market, for a number of reasons 17
Despite the credit crunch, buy-to-let looks set to remain an important area of specialist mortgage lending 18
Buy-to-let will continue to play an important role in the mortgage market 18
As an investment, buy-to-let has proven to give a better return than investing in the stock market 18
Despite some investors selling their property, professional landlords are expected to stay put 18
Some landlords intend to sell off all or part of their property portfolio 19
Falling house prices would not persuade most landlords to sell their property investments 20
Landlords are becoming less likely to add to their existing property portfolio 21
The majority of landlords felt that migrants from new EU countries have had a positive effect on rental demand 22
The market may become more regulated as a result of the credit crunch 23
The buy-to-let market is currently lightly regulated 23
Changes to the capital gains tax system will make life easier for landlords 23
Energy Performance Certificates are likely to have a minimal impact on demand for buy-to-let products 24
The Law Commission's belief that there should be more regulation of the buy-to-let sector may cause difficulties in the market 24
Sale-and-rent-back is one area of the market where regulation may be required 24
The OFT report suggests regulation as a solution 25
The Rugg Review could result in increased regulation for landlords 25
Competitive Landscape 26
The buy-to-let mortgage market is split into two types of players 26
The buy-to-let mortgage market is split into lenders and intermediaries 26
Buy-to-let remained an attractive market for all the major mortgage lenders in 2007 26
The majority of top 10 providers maintained their market position between 2006 and 2007 27
Bristol & West has increased its market share due to aggressive selling 27
The top three providers made up 45% of the buy-to-let market in 2007 28
Buy-to-let lenders increased their advertising expenditure in 2007 30
The fallout from the credit crunch has had an effect on the number of competitors in 2008 30
The top 10 lenders changed significantly in H1 2008 32
Four of the top 10 providers have exited the market 32
The Northern Rock crisis had little effect on the market 33
Players such as Bradford & Bingley overstretched themselves in the buy-to-let sector 33
The merger between Lloyds TSB and HBOS may have repercussions for the buy-to-let market 33
Lender's underwriting criteria have become more strict, with many lenders pulling out 34
The number of buy-to-let deals available has shrunk considerably since the credit crunch began 34
A decrease in competition is reflected in how the available offers have changed over the last 18 months 35
The average buy-to-let rate increased from May 2007 to June 2008 before easing off in October 2008 35
Bristol & West is the only provider to have held steady with its LTV ratio 37
Rental cover has gone up significantly 38
The other criteria for buy-to-let mortgages have shown less movement since the credit crunch began 38
There has been no real change in the minimum advance offered by the top 10 lenders 38
Lenders have made small tweaks to their fee structure 39
Bristol & West have cut the maximum property portfolio allowed 40
Maximum total advances for property providers have remained static 41
The buy-to-let offer remains open to first-time buyers in most cases 42
Intermediaries are fighting to maintain their share of the market 43
The share of intermediaries has seen some falls recently 43
Almost 20% of mortgage intermediaries have seen new lending in the buy-to-let sector fall by 51-70% 43
Market Forecasts 45
The buy-to-let market will remain an important niche sector 45
From its inception, the buy-to-let property market offered stability in the housing market 45
Rental demand in the buy-to-let market is likely to remain moderately strong over the next few years 45
People losing their home will have to move into rental accommodation 45
The student population is likely to grow 45
There is still a shortage of property in the UK 45
Immigration to the UK will continue to support demand for rental property in the short term 46
The market remains vulnerable to uncertainties 46
A large downturn in house prices will test the strength of borrowers 46
A large portfolio is no guarantee of stability if the risk is not spread 46
Repossessions are likely to remain higher in the buy-to-let market than in the wider market 47
Three scenarios have been constructed from the previous analysis 47
Datamonitor sets out three scenarios to outline the future of the buy-to-let market 47
Under the neutral scenario, gross advances in the buy-to-let mortgage market will drop to £27.7 billion in 2008 48
Under the optimistic scenario, the buy-to-let market will reach £37.8 billion in gross advances in 2012 49
Under the pessimistic scenario, Datamonitor expects gross advances in the buy-to-let market to remain well below 2007 levels at £29.8 billion in 2012 51
APPENDIX 53
Definitions 53
Bank of England base rate 53
Balances outstanding 53
Buy-to-let mortgage 53
CAGR 53
Gross advances 53
Mortgage intermediary 53
Non-standard and sub-prime 53
Professional landlords 53
Remortgaging 54
Supplementary data 54
Tables from Market Context chapter 54
Tables from Competitive Landscape chapter 61
Further reading 62
Ask the analyst 62
Datamonitor consulting 62
Disclaimer 62
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Table 1: The presence of the top 10 mortgage lenders of 2007 in the buy-to-let market, November 2008 27
Table 2: Ranking of top 10 buy-to-let mortgage lenders by gross advances, 2006-07 28
Table 3: Buy-to-let gross advances and competitor share for the top eight buy-to-let lenders, 2007 29
Table 4: Top 10 buy-to-let advertisers in 2007 30
Table 5: List of buy-to-let mortgage lenders in the UK, November 2008 31
Table 6: Ranking of top 10 buy-to-let providers, H1 2008 32
Table 7: Variable rate offered by the top 10 buy-to-let lenders, May 2007 to October 2008 37
Table 8: Maximum loan-to-value offered by the top 10 buy-to-let lenders, May 2007 to October 2008 38
Table 9: Minimum advance offered by the top 10 buy-to-let providers, May 2007 to October 2008 39
Table 10: The fee structure offered by the top 10 buy-to-let providers, May 2007 to October 2008 40
Table 11: Maximum property portfolio for the top 10 buy-to-let providers, May 2007 to October 2008 41
Table 12: Maximum total advance for top 10 buy-to-let property providers, May 2007 to October 2008 42
Table 13: Availability of offer to first-time buyers for top 10 buy-to-let lenders, May 2007 to October 2008 43
Table 14: Forecast of buy-to-let gross advances under the neutral scenario, 2007-12f 49
Table 15: Forecast of buy-to-let gross advances under the optimistic scenario, 2007-12f 51
Table 16: Forecast of buy-to-let gross advances under the pessimistic scenario, 2007-12f 52
Table 17: Gross advances and number of loans in the buy-to-let market on a yearly basis, 1999-07 54
Table 18: Gross advances and number of loans in the buy-to-let market on a quarterly basis, Q3 2006-Q2 2008 55
Table 19: Year-on-year percentage growth in UK house prices, January 2007-October 2008 56
Table 20: Buy-to-let mortgages in arrears as a percentage of outstanding buy-to-let mortgages on a yearly basis, 2000-07 57
Table 21: Buy-to-let mortgages in arrears as a percentage of outstanding buy-to-let mortgages on a quarterly basis, Q3 2006-Q2 2008 57
Table 22: Landlords' likelihood to sell all or some properties, March-September 2008 58
Table 23: Landlords' likelihood to sell property if house prices were to fall, March-September 2008 58
Table 24: Landlords' anticipation of buying further properties in the next 12 months, March-September 2008 59
Table 25: Effect of immigration on private rental market in 2008, September 2008 59
Table 26: Mortgaged properties taken into possession during the given period, H2 2004-H1 2008 60
Table 27: Mortgaged properties in possession at the end of the given period, H2 2004-H1 2008 60
Table 28: Number of buy-to-let (BTL) products split by product type, February 2007 - November 2008 61
Table 29: By how much have you seen new lending in the buy-to-let mortgage sector fall in 2008? 62
Figure 1: Since April 2008, both Halifax and Nationwide have shown a decrease in year-on-year house prices 3
Figure 2: Live buy-to-let products reached a peak in September 2007 before falling away 4
Figure 3: The buy-to-let mortgage market saw an increase in both gross lending and volume of loans, although growth was slower in 2007 than in 2006 10
Figure 4: Gross advances and the number of loans have both fallen since reaching a peak in Q3 2007 11
Figure 5: Since April 2008, both Halifax and Nationwide have shown a decrease in year-on-year house prices 13
Figure 6: The percentage of buy-to-let mortgages in arrears has increased significantly in 2007 14
Figure 7: The percentage of buy-to-let loans in arrears overtook the overall market in Q3 2008 15
Figure 8: The percentage of properties repossessed in H1 2008 is about 0.16% for both buy-to-let and the total mortgage market 16
Figure 9: The percentage of buy-to-let properties seized by lenders overtook the percentage for the total market in H2 2007 17
Figure 10: Almost 80% of landlords do not intend to sell any residential properties in the next 12 months 20
Figure 11: The percentage of respondents stating they would not sell their property if house prices fell, dropped to 87.4% in September 2008 21
Figure 12: The percentage of landlords considering purchasing further properties fell in September 2008 22
Figure 13: The overwhelming majority of respondents stated that immigrants had affected the rental market in 2008 23
Figure 14: The top four lenders accounted for 51.1% of buy-to-let gross advances in 2007 29
Figure 15: Live buy-to-let products reached a peak in September 2007 before falling away 34
Figure 16: Since January 2008, there has been a disparity between the average buy-to-let rate and the Bank of England base rate 36
Figure 17: The vast majority of intermediaries have seen a fall in their buy-to-let lending in 2008 44
Figure 18: Under the neutral scenario, buy-to-let will account for just 10.4% of new lending in the UK mortgage market in 2009 49
Figure 19: Under the optimistic scenario, buy-to-let will increase its market share of the total mortgage market slightly to 12.5% in 2012 50
Figure 20: Under the pessimistic scenario, buy-to-let gross advances will fall to a nadir of £21.5 billion in 2010 52
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