Signs of life in buy-to-let market

Lending on buy-to-let properties is now increasing for the first time in two years, but experts warn that a recovery to 2007 levels will not be seen in the near term.

Buy-to-let has been one of the hardest-hit sectors of the mortgage market, with 93 per cent of all mortgage deals disappearing over the past two years. Most buy-to-let investors have been forced to move on to their lenders’ standard variable rate (SVR), because of the lack of refinancing options.

But, according to Moneyfacts, the online comparison service, the number of buy-to-let products available increased to 239 in November, up from a low of 179 in September.

And last week, the Council of Mortgage Lenders reported an increase in buy-to-let gross lending for the first time in two years. Lending increased 10 per cent to £2.1bn in the third quarter and the number of buy-to-let loans advanced by lenders rose from 21,600 to 23,700.

However, mortgage brokers point out that the recent recovery comes from a low base, after a steep fall in lending volumes and available loans.

Andy Pratt, chief operating officer of Alexander Hall, the mortgage broker, said that the lack of competition in the buy-to-let lending market was still a big problem.

The number of buy-to-let loans is significantly lower than at the peak of the market in August 2007, when 3,662 products were available. At the height of the housing market boom, 64.8 per cent of deals required a deposit of 10 or 15 per cent. There are no such products available today.

Only four loans, from sister banks Clydesdale and Yorkshire, remain for landlords with a 20 per cent deposit and, if landlords want a wider choice of mortgages, they need a deposit of at least a 25 per cent.

“Many landlords’ biggest problem in securing a competitive deal will be finding the deposit needed, as previous house price falls are likely to have eaten into the equity available in their portfolio,” said Michelle Slade of Moneyfacts.

Experts say the buy-to-let sector will be slower to recover than the mainstream market as lenders continue to avoid riskier mortgages.

“I think, in the short term, the volume of funding currently in the market will be concentrated on the residential sector,” said Jonathan Cornell of First Action Finance.

For those buy-to-let investors who can get deals, the good news is that interest rates are lower than they were two years ago.

The average two-year fixed rate was 6.28 per cent in August 2007, compared with 5.71 per cent today. Similarly, the average two-year tracker has fallen from 6.35 per cent to 4.47 per cent.

The Mortgage Works is offering a two-year fixed rate at 4.79 per cent for a maximum loan-to-value of 60 per cent, with an arrangement fee of 3.5 per cent.

Woolwich has a lifetime tracker at a rate of 3.99 per cent – bank base rate plus 3.49 per cent – which also requires a deposit of 40 per cent or more. The arrangement fee is 1.75 per cent of the loan.

“We do think the buy-to-let market is in the process of proving it is here to stay – it wasn’t just the product of an overheated asset bubble over the last 10 years,” said Matthew Wyles, group director at Nationwide.

He said there would not be a return to the huge
supply of buy-to-let finance of two years ago, but argued that this was a good thing.

“What we will see now
is a much more conservative and mature buy-to-let finance market, occupied
by lenders who know what they are doing. I think that’s a good thing for
borrowers and lenders alike.”