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Buy-to-let Mortgages - UK - March 2011

Taking into account recent developments and new business data, this report provides a comprehensive overview of the market and considers its prospects for further growth. Drawing on a range of information sources, including consumer survey findings and trade interviews, the report examines distribution trends, identifies the main players and their respective market shares and reveals the key issues exerting influence over the market.

  • The liquidity drought, caused by the collapse of the wholesale funding markets, led to an exodus of many smaller and specialist lenders who were reliant on this source of funding. As a result, the buy-to-let market has become highly concentrated and much less competitive, potentially offering opportunities for new entrants to rapidly expand.
  • The buy-to-let market has grown strongly over the past decade and a half, although the pace of market expansion has slowed since 2007, due to the effects of the financial crisis.
  • There are around 1.3 million buy-to-let mortgages outstanding. Given that there are some 3.4 million privately rented properties in the UK, this suggests that nearly two fifths of them are being financed by a buy-to-let mortgage.
  • New business volumes have also shrunk to less than a third of what they were in 2006 and 2007. However, supply has recently picked up and the market has started to recover.
  • Although the issue of funding remains an ongoing challenge, lenders are generally feeling more positive about the market’s prospects and expect to see further growth in 2011.
  • The underlying fundamentals remain solid, with strong tenant demand, moderating house-price inflation, and high levels of consumer interest in direct property investment.

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Table of contents

  1. Introduction

      • Market history
        • Product definition and pricing
          • Abbreviations
          • Issues in the Market

              • How important is buy-to-let to the UK’s property market?
                • Has the industry started to recover from the financial crisis?
                  • Is there scope for increased differentiation or innovation?
                    • Are lenders still risk-averse?
                      • Has the slowdown hit the public’s appetite for property investment?
                      • Future Opportunities

                          • Trend: Property continues to be seen as a solid investment
                            • Trend: Property substitutes for a pension
                            • Executive Summary

                                • The market
                                  • Figure 1: Forecast of the number of new BTL mortgage sales – fan chart, 2005-15
                                • 2010 saw the market begin to recover
                                  • The rate of market expansion slowed as a result of the financial crisis
                                    • Figure 2: Key market fundamentals, 2010 (year end)
                                  • New business will continue to pick up steadily
                                    • Market factors
                                      • Strong demand for rental property in the UK
                                        • Demand for buy-to-let lending expected to be flat in 2011
                                          • Arrears fall, while lenders enjoy fat margins
                                            • Threat of FSA regulation recedes
                                              • Company, brands and innovation
                                                • BM Solutions and The Mortgage Works dominate the market
                                                  • Figure 3: Company share of new buy-to-let advances (shown on a group basis), 2009
                                                • Reduced supply means less competition
                                                  • Limited adspend due to dominance of adviser sales
                                                    • The consumer
                                                      • House price predictions
                                                        • Attitudes towards property investment
                                                          • Figure 4: Attitudes towards investing in buy-to-let, January 2011
                                                        • What we think
                                                        • Internal Market Environment

                                                          • Key points
                                                            • Impact of financial crisis
                                                              • Housing market activity
                                                                • Rental demand and supply
                                                                  • Void periods, tenant defaults and loan arrears
                                                                    • Figure 5: Percentage of outstanding loans three or more months in arrears – buy-to let and total mortgage market, 2007-10
                                                                  • Regulatory developments and policy changes
                                                                    • Buy-to-let mortgage demand increased in 2010, but will this trend continue in 2011?
                                                                      • Figure 6: Demand for buy-to-let and prime lending (house purchase), 2008-10
                                                                    • Positive lending spreads imply improved credit availability
                                                                      • Figure 7: Spreads on buy-to-let lending – retrospective and forward-looking, 2008-10
                                                                    • Lenders are benefiting from wide margins on new mortgages
                                                                      • Figure 8: Bank of England base rate, three-month (monthly average) sterling LIBOR and effective rate on new mortgages, January 2005-December 2010
                                                                  • Broader Market Environment

                                                                    • Key points
                                                                      • Average value of rented property fell during 2010
                                                                        • Figure 9: Average value of rented houses versus rented flats, Q1 2007-Q4 2010
                                                                      • Geared investments offer better returns than cash buys
                                                                        • Figure 10: Average net annual compound rate of return over five years – geared versus cash purchase investment, Q4 2006-Q4 2010
                                                                      • Slight regional variation in geared-investment returns
                                                                        • Figure 11: Annual compound rates of return on buy-to-let investment over a five-year period – geared investments only, by region, Q4 2010
                                                                      • Landlord characteristics and behaviour
                                                                        • Changing social trends fuel demand for rented property
                                                                          • Rising number of students fuels demand for rented accommodation
                                                                            • Figure 12: Number of students in Further and Higher Education, 2005/06-2009/10
                                                                          • Demand is also being driven by continuing high levels of net migration
                                                                            • Figure 13: Long-term international migration flows – UK, 2000-09 (year end)
                                                                          • Sharp drop in new private builds exacerbates housing shortage
                                                                            • Figure 14: Number of permanent dwellings completed, by tenure – UK, 1990/91-2009/10
                                                                        • Competitive Context

                                                                          • Key points
                                                                            • Buy-to-let mortgage sector: hit harder, but bounced back quicker
                                                                              • Figure 15: Annual percentage change in gross advances – buy-to-let versus total mortgage market, 2002-10
                                                                            • Property has lost some of its shine
                                                                              • Figure 16: Percentage of GB adults who consider asset the best for long-term investment, September 2007-December 2010
                                                                              • Figure 17: Percentage of adults who still think property is a good long-term investment, by age, January 2011
                                                                            • The privately rented sector accounts for one in eight UK properties
                                                                              • Figure 18: Total number of UK dwellings, by tenure, 1996-2010
                                                                              • Figure 19: Share of private rental dwellings being purchased with a buy-to-let mortgage, 2000-10
                                                                          • Market SWOT Analysis

                                                                              • Figure 20: Buy-to-let mortgage market – strengths, weaknesses, opportunities and threats, 2011
                                                                          • Who’s Innovating?

                                                                            • Key points
                                                                              • Product availability improves, but there’s little in the way of innovation
                                                                                • Figure 21: Number of buy-to-let and residential mortgages and number of buy-to-let lenders, 2007-11
                                                                              • Limited price differentiation
                                                                                • Trend watch
                                                                                • Market Size and Forecast

                                                                                  • Key points
                                                                                    • There are now 1.3 million buy-to-let loans outstanding
                                                                                      • Figure 22: Number and value of buy-to-let mortgages outstanding, 2000-10 (year end)
                                                                                    • Value of new buy-to-let business up by a fifth in 2010
                                                                                      • Figure 23: Volume and value of new buy-to-let mortgages, 2001-10
                                                                                    • Mintel predicts a steady recovery for the market over the next five years
                                                                                        • Figure 24: Forecast of the number of new BTL mortgage sales – fan chart, 2005-15
                                                                                        • Figure 25: Forecast of the value of new BTL mortgage advances – fan chart, 2005-15
                                                                                        • Figure 26: Forecast of new BTL mortgage business, at current and constant prices, 2005-15
                                                                                      • Forecast methodology
                                                                                        • Fan chart explanation
                                                                                        • Market Share

                                                                                          • Key points
                                                                                            • Two lenders dominate the buy-to-let market
                                                                                              • Figure 27: Buy-to-let amounts outstanding – selected lenders only, 2009 and 2010
                                                                                          • Companies and Products

                                                                                              • Lloyds Banking Group
                                                                                                • Nationwide
                                                                                                  • Paragon Group
                                                                                                  • Brand Communication and Promotion

                                                                                                    • Key points
                                                                                                      • Overall mortgage adspend has increased over the past year
                                                                                                        • Figure 28: Total advertising expenditure on mortgage products, by sub-category, 2006-10
                                                                                                      • Limited buy-to-let advertising
                                                                                                        • Figure 29: Adspend on mortgage products, by buy-to-let advertisers, year to 31 October 2010
                                                                                                    • Channels to Market

                                                                                                      • Key points
                                                                                                        • Mortgage intermediary share declined in the broader market…
                                                                                                          • Figure 30: Proportional distribution of regulated mortgage sales – total market, by channel, 2006/07-2009/10
                                                                                                        • …but they still generate the lion’s share of new buy-to-let business
                                                                                                          • Figure 31: Distribution channels used by selected buy-to-let lenders, 2010
                                                                                                        • Online support
                                                                                                        • Property Ownership and Aspirations

                                                                                                          • Key points
                                                                                                            • Survey background
                                                                                                              • Three in five UK adults are owner-occupiers
                                                                                                                  • Figure 32: Trends in property ownership and buying intentions, 2006-11
                                                                                                                • One in 20 own a second home
                                                                                                                  • Figure 33: Number of actual and prospective second property owners, January 2011
                                                                                                                • One in eight property investors plan to grow their portfolios
                                                                                                                  • Figure 34: Intentions to make further property purchases, by second property owners, January 2011
                                                                                                                • Mortgage holders are just as likely as outright owners to invest in buy-to-let
                                                                                                                  • Figure 35: Property ownership and buying intentions, by tenure, January 2011
                                                                                                                • Around one in ten ABs own additional property
                                                                                                                  • Figure 36: Property ownership and buying intentions, by gender and socio-economic group, January 2011
                                                                                                                • Buy-to-let landlords are typically aged 45-64
                                                                                                                  • Figure 37: Property ownership and buying intentions, by age, January 2011
                                                                                                              • Property Price Predictions

                                                                                                                • Key points
                                                                                                                  • Most people expect house prices to stagnate or grow slightly in 2011
                                                                                                                    • Figure 38: Expected property price movement over the next 12 months, 2009-11
                                                                                                                  • Property investors are marginally more cautious/negative
                                                                                                                    • Figure 39: Expected property price movement over the next 12 months, by owner-occupiers, second property owners and prospects, January 2011
                                                                                                                • Buy-to-let Investors and Prospects

                                                                                                                  • Key points
                                                                                                                    • One in 20 UK adults own rental property
                                                                                                                        • Figure 40: Identifying buy-to-let investors and new prospects, January 2011
                                                                                                                      • Excellent growth potential
                                                                                                                        • Figure 41: Identifying buy-to-let investors and new prospects, by gender and socio-economic group, January 2011
                                                                                                                      • High levels of interest in buy-to-let among the under-45s
                                                                                                                        • Figure 42: Identifying buy-to-let investors and new prospects, by age, January 2011
                                                                                                                    • Attitudes Towards Property Investment

                                                                                                                      • Key points
                                                                                                                        • One in seven UK adults say they’d prefer to invest in property than in a pension
                                                                                                                            • Figure 43: Attitudes towards property investment, January 2011
                                                                                                                          • Existing investors are more positive and pragmatic
                                                                                                                            • Figure 44: Attitudes towards property investment, by buy-to-let investors and new prospects, January 2011
                                                                                                                        • Appendix – Demographic Analysis of Property Ownership

                                                                                                                            • Figure 45: Property ownership, by demographics, January 2011
                                                                                                                        • Appendix – Profile of Buy-to-let Investors and Prospects

                                                                                                                            • Figure 46: Demographic profile of total sample versus buy-to-let investors and prospects, January 2011

                                                                                                                        Companies Covered

                                                                                                                        • Asda Group Ltd
                                                                                                                        • Association of British Insurers
                                                                                                                        • Association of Residential Letting Agents
                                                                                                                        • Bank of England
                                                                                                                        • Bank of Ireland
                                                                                                                        • Barclays Bank plc
                                                                                                                        • Birmingham Midshires
                                                                                                                        • Britannia Building Society
                                                                                                                        • CACI Limited
                                                                                                                        • Cheltenham & Gloucester plc
                                                                                                                        • Clydesdale Bank
                                                                                                                        • Co-operative Bank
                                                                                                                        • Co-operative Group
                                                                                                                        • Council of Mortgage Lenders
                                                                                                                        • Coventry Building Society
                                                                                                                        • Dunfermline Building Society
                                                                                                                        • Financial Services Authority (The)
                                                                                                                        • Gfk NOP
                                                                                                                        • Godiva Chocolatier
                                                                                                                        • Grupo Santander Central Hispano S.A.
                                                                                                                        • HBOS plc (Halifax Bank of Scotland)
                                                                                                                        • Higher Education Statistics Agency
                                                                                                                        • Intelligent Finance
                                                                                                                        • Investec
                                                                                                                        • J. Sainsbury
                                                                                                                        • Kensington Mortgages
                                                                                                                        • Lloyds Banking Group
                                                                                                                        • Lloyds TSB Insurance
                                                                                                                        • Macquarie Group
                                                                                                                        • Market & Opinion Research International (MORI)
                                                                                                                        • Marks & Spencer
                                                                                                                        • National Australia Bank
                                                                                                                        • National Savings & Investments
                                                                                                                        • Nationwide Building Society
                                                                                                                        • NatWest
                                                                                                                        • Northern Rock plc
                                                                                                                        • Office of Fair Trading
                                                                                                                        • Pink Home Loans
                                                                                                                        • Platform
                                                                                                                        • Portman Building Society
                                                                                                                        • Post Office Limited
                                                                                                                        • Royal Bank of Scotland Group plc
                                                                                                                        • Somerfield
                                                                                                                        • Tesco Plc
                                                                                                                        • The Mortgage Business
                                                                                                                        • The Paragon Group of Companies PLC
                                                                                                                        • UBS Wealth Management UK Ltd
                                                                                                                        • UCB Home Loans
                                                                                                                        • Virgin Money
                                                                                                                        • Waitrose Ltd
                                                                                                                        • Wm Morrison Supermarkets
                                                                                                                        • Woolwich plc
                                                                                                                        • Yorkshire Bank PLC

                                                                                                                        Buy-to-let Mortgages - UK - March 2011

                                                                                                                        £1,750.00 (Excl.Tax)