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Buy-to-let Mortgages - UK - March 2015

“For the majority of people who will benefit from the pensions freedoms, a buy-to-let investment is unlikely to be either a viable or an enticing investment option. Even ignoring funding complications, the perceived hassle of being a landlord puts many off. As Mintel’s data reveals, among those already retired and who are non-landlords, 94% would not consider investing in property in the future.”
– Sean Song, Research Analyst – Financial Services

This report looks at the following areas:

  • The calls for regulation and the impact of the European Mortgage Credit Directive
  • Impact of pensions reform in April 2015
  • England’s shifting housing dynamics

The buy-to-let market has grown in terms of values advanced in 2014. This reflects strong, sustained rental demand, and confidence in the property market. In turn, this has led to an optimistic outlook from lenders in the market, who are backing the buy-to-let market to continue its growth into 2015. In light of this, there has been a wave of major competitors entering the market, which has put downward pressure on mortgage rates.

In turn, these low rates have made buy-to-let even more attractive to many customers, especially when considering how low current saving rates are. There has also been speculation as to whether the market will be impacted by the pension freedoms coming into effect in April 2015, which will allow pensioners more flexibility with how they access their pension pots.

Understanding who these potential investors are is crucial, as is helping them understand the buy-to-let market. This report examines attitudes towards property investment among both non-landlords and existing landlords, and also looks at likeliness to invest. Analysis of key market drivers, such as housing stock, arrear rates, and effective mortgage rates, is also included. The impact of regulatory changes, including the European Mortgage Credit Directive, and pension freedoms are analysed, as is the risk of further regulatory changes.

The buy-to-let market will continue to flourish outside the wider mortgage regulation framework into 2015, as rental demand increases, and house prices remain healthy. Both lenders and landlords are optimistic about the market’s prospects and this is reflected in lenders’ positive quarterly outlook and the likeliness of current landlords to expand their portfolios.

As the market expands, high street banks can expect to cater for the first-time buyers, while existing landlords may be in need of more specialist brokers who can factor in more complex portfolios which may include HMOs, especially as these properties yield higher margins. As banks may be hesitant to dip their feet into the specialist and commercial buy-to-let lending due to time and costs associated with hiring specialist underwriters and upgrading systems, there will be room for expansion for smaller and more specialist lenders.

When the interest rate increases, first-time landlords and existing landlords will become more wary of the need to gear their investments in the best way possible. Longer term fixed-rate products are likely to appeal to customers, particularly those who may have a more modest portfolio size.

The buy-to-let market should also take note of the regulations that have been imposed on the wider mortgage market. Although currently only accounting for a roughly 18-20% of the wider market, buy-to-let’s share is growing, and will only attract more and more attention as the government assesses the risk buy-to-let lending may have on financial stability in general. In keeping with this, the industry should aim to implement long-term strategies which focus on stabilizing certain factors such as rental cover, so as to avoid state intervention.


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Table of contents

  1. Introduction

      • Product definition
        • Abbreviations
        • Executive Summary

            • The market
              • New buy-to-let advances increased 24% in 2014
                • Figure 1: Market forecast of new buy-to-let mortgage loans, 2009-19
              • The market is set to grow 15% in 2015 to £31.4 billion in new loan values
                • Market factors
                  • The rental market continues to expand as demand grows
                    • Figure 2: UK Housing stock, by tenure 2009-14
                  • New private builds improve 5% year on year but supply still falls short of demand
                    • Regulation update
                      • Company, brands and innovation
                        • Lloyds Banking Group and Nationwide dominate the market
                          • Figure 3: Market share of sub-total of Top 7 lenders, 2014
                        • Growing presence of other high street banks
                          • New challengers appear
                            • The consumer
                              • 6% of GB adults are landlords
                                • Figure 4: Rental property ownership, December 2014
                              • Self-employed individuals were also three times more likely than average to be a landlord
                                • Figure 5: Additional property ownership, by working situation, December 2014
                              • 13% of non-landlords aged over 55+ with a pension are considering investing in buy-to-let
                                • Figure 6: Non-Landlords’ investment plans, by investment ownership, December 2014
                              • Roughly one in five landlords have a buy-to-let mortgage
                                • Figure 7: How landlords are funding properties, December 2014
                              • One in 10 landlords are serious considering buying another property to add to their portfolio
                                • Figure 8: Landlords’ future investment plans, December 2014
                              • More than a quarter of non-landlords would consider becoming a landlord
                                • Figure 9: Non-landlords’ future investment plans, December 2014
                              • Barriers to entry for non-landlords
                                • Figure 10: Non-landlords’ investment plans, by attitudes towards buy-to-let, December 2014
                              • What we think
                              • Issues and Insights

                                  • The calls for regulation and the impact of the European Mortgage Credit Directive
                                    • The issues
                                      • The implications
                                        • Impact of pensions reform in April 2015
                                          • The issues
                                            • The implications
                                              • England’s shifting housing dynamics
                                                • The issues
                                                  • The implications
                                                  • Trend Application

                                                    • 55-64-year-olds represent a challenging yet potentially fruitful market
                                                      • Buy-to-let product marketing should aim for transparency
                                                        • Proactively regulate the market, or risk state intervention
                                                        • Market Drivers

                                                          • Key points
                                                            • Demand for buy-to-let lending dropped significantly in Q4 2014
                                                              • Figure 11: Demand for buy-to-let and prime lending, 2010-14
                                                            • Lenders’ outlook continues to be positive
                                                              • Figure 12: Expectations of demand for buy-to-let and prime lending, 2010-15
                                                            • Spreads on buy-to-let lending fell at increasing rates during the final three quarters of 2014
                                                              • Figure 13: Spreads on buy-to-let lending – retrospective and forward-looking, 2010-14
                                                            • Mortgage rates level out, but profit margins stay healthy
                                                              • Figure 14: Bank of England base rate, three-month (monthly average) LIBOR and effective new mortgage rate, January 2009-November 2014
                                                            • Low base rates support demand for buy-to-let finance
                                                              • Arrears and number of repossessions in buy-to-let fall in 2014
                                                                • Figure 15: Total number of property repossessions and buy-to-let repossessions, Q1 2013-Q3 2014
                                                              • Geared investments offer almost double return rates over cash purchases
                                                                • Figure 16: Average net annual compound rate of return over five years – geared versus cash purchase investment, Q1 2009 – Q4 2014
                                                              • Regional variation in geared-investment returns shows North East as biggest winners, while ‘Rest of London’ yields plummet
                                                                • Figure 17: Annual compound rates of return on buy-to-let investment over a five-year period – geared investments only, by region, Q4 2014
                                                              • Recent regulatory and policy developments
                                                              • UK Housing Stock

                                                                • Key points
                                                                  • The privately rented sector accounts for over one in five UK properties
                                                                    • Figure 18: UK Housing stock, by tenure, 2009-14
                                                                  • In England the number of renters overtakes the number of mortgage holders for 25-34 year olds
                                                                    • New private builds improve 5% year on year but supply still falls short of demand
                                                                      • Figure 19: Number of permanent dwellings completed, by tenure – UK, 2007/08-13/14
                                                                  • Market SWOT Analysis

                                                                      • Figure 20: Buy-to-let mortgage market – strengths, weaknesses, opportunities and threats, 2015
                                                                  • Who’s Innovating?

                                                                    • Key points
                                                                      • Mainstream lenders cater for the first-time landlords
                                                                        • New challengers appear
                                                                          • Pepper UK
                                                                            • Axis
                                                                              • Fleet Mortgages
                                                                                • The Post Office
                                                                                  • Landbay – Peer to Peer funded buy-to-let lending
                                                                                    • Paratus AMC launches buy-to-let products through Foundation Home Loans (FHL)
                                                                                      • Lenders slash rates in price wars
                                                                                      • Market Size and Forecast

                                                                                        • Key points
                                                                                          • New buy-to-let loans increase at record amount
                                                                                            • Figure 21: Volume and value of new buy-to-let mortgages, 2008-14
                                                                                          • Growth in value of advances in buy-to-let was strongly driven by re-mortgage loans
                                                                                            • Figure 22: Value of advances for new buy-to-let re-mortgage/new house loans, January 2014-November 2014
                                                                                          • Mintel expects the market to grow to £44 billion by 2019
                                                                                            • Figure 23: Forecast of new buy-to-let mortgage advances – fan chart, 2009-19
                                                                                            • Figure 24: Figure 21: Forecast of the number of new buy-to-let mortgage sales – fan chart, 2009-19
                                                                                          • Forecast methodology
                                                                                            • Fan chart explanation
                                                                                            • Market Share

                                                                                              • Key points
                                                                                                • Lloyds Banking Group and Nationwide lead the market by a large margin
                                                                                                  • Figure 25: Buy-to-let amounts outstanding – selected lenders only, 2013-14
                                                                                              • Companies and Products

                                                                                                • Lloyds Banking Group
                                                                                                  • Buy-to-let product range
                                                                                                    • Market position
                                                                                                      • Recent financial performance
                                                                                                        • Figure 26: Key annual financial data for LBG, 2013-14
                                                                                                      • Recent activity
                                                                                                        • Nationwide and The Mortgage Works
                                                                                                          • Buy-to-let product range
                                                                                                            • Market position
                                                                                                              • Recent financial performance
                                                                                                                • Figure 27: Key interim financial data for Nationwide, H1 2013 and H1 2014
                                                                                                              • Recent activity
                                                                                                                • Paragon
                                                                                                                  • Buy-to-let product range
                                                                                                                    • Market position
                                                                                                                      • Recent financial performance
                                                                                                                        • Figure 28: Key annual financial data for The Paragon Group, 2013 and 2014
                                                                                                                      • Recent activity
                                                                                                                        • Barclays
                                                                                                                          • Buy-to-let product range
                                                                                                                            • Market position
                                                                                                                              • Recent financial performance
                                                                                                                                • Recent activity
                                                                                                                                • Brand Communication and Promotion

                                                                                                                                  • Key points
                                                                                                                                    • Overall mortgage adspend has decreased over the past year
                                                                                                                                      • Figure 29: Total advertising expenditure on mortgage products, by sub-category, 2010-14
                                                                                                                                    • Limited buy-to-let advertising
                                                                                                                                      • Figure 30: Adspend on buy-to-let mortgages, by selected advertisers and media type, 2014
                                                                                                                                  • Channels to Market

                                                                                                                                    • Key points
                                                                                                                                      • The majority of buy-to-let providers utilise intermediaries
                                                                                                                                        • Figure 31: Distribution channels used by selected buy-to-let lenders, February 2015
                                                                                                                                      • Intermediaries’ role in mortgage sales grow
                                                                                                                                        • Figure 32: Proportional distribution of regulated mortgage sales, by channel, 2010-14
                                                                                                                                    • Rental Property Ownership

                                                                                                                                      • Key points
                                                                                                                                        • Survey background
                                                                                                                                          • 6% report owning at least one rental property
                                                                                                                                            • Figure 33: Rental property ownership, December 2014
                                                                                                                                          • More than one in 20 people are landlords
                                                                                                                                            • People who are married are more likely to be landlords
                                                                                                                                              • There are a greater number of landlords in London and the South
                                                                                                                                                • Self-employed respondents are three times more likely to be landlords
                                                                                                                                                  • Figure 34: Rental property ownership, by working situation, December 2014
                                                                                                                                              • The Impact of Pension Reform

                                                                                                                                                • Key points
                                                                                                                                                  • Two in five people have some form of pension provision
                                                                                                                                                    • Figure 35: Ownership of investments, December 2014
                                                                                                                                                  • 13% of non-landlords aged over 55+ with a pension are considering investing in buy-to-let…
                                                                                                                                                    • Figure 36: Non-landlords’ investment plans, by investment ownership, December 2014
                                                                                                                                                  • … but pension freedom is unlikely to transform the market
                                                                                                                                                  • Buy-to-let Mortgage Ownership

                                                                                                                                                    • Key points
                                                                                                                                                      • Roughly one in five landlords have a buy-to-let mortgage
                                                                                                                                                        • Figure 37: How landlords are funding properties, December 2014
                                                                                                                                                      • Private rented accommodation is roughly half mortgage-funded, half owned outright
                                                                                                                                                        • 30% of rented accommodation is funded through residential mortgages
                                                                                                                                                        • Reasons for Becoming a Landlord

                                                                                                                                                          • Key points
                                                                                                                                                            • Half of all privately rented accommodation is bought specifically as an investment property
                                                                                                                                                              • Figure 38: Reasons for becoming a landlord, December 2014
                                                                                                                                                            • Over one in five landlords let out property as a result of changes in living situation
                                                                                                                                                            • Landlords’ Investment Plans

                                                                                                                                                              • Key points
                                                                                                                                                                • One in 10 landlords are serious considering buying another property to add to their portfolio
                                                                                                                                                                  • Figure 39: Landlords’ future investment plans, December 2014
                                                                                                                                                                • Roughly one in 10 landlords are potentially looking to buy another property to let out
                                                                                                                                                                • Non-landlords’ Investment Plans

                                                                                                                                                                  • Key points
                                                                                                                                                                    • More than a quarter of non-landlords would consider becoming a landlord
                                                                                                                                                                      • Figure 40: Non-landlords’ future investment plans, December 2014
                                                                                                                                                                    • Non-landlords from Scotland and the North West are most likely to consider investing in property
                                                                                                                                                                      • Figure 41: Non-landlords’ investment plans, by region, December 2014
                                                                                                                                                                    • Almost one in five non-landlords aged 55-64 would consider property investment
                                                                                                                                                                      • Figure 42: Non-landlords’ investment plans, by selected age and working status, December 2014
                                                                                                                                                                    • Disinterest increases greatly from non-landlords aged 65+ and among those already retired
                                                                                                                                                                      • Barriers to entry for non-landlords
                                                                                                                                                                        • Figure 43: Non-landlords’ investment plans, by attitudes towards buy-to-let, December 2014
                                                                                                                                                                    • Attitudes towards Property Investment

                                                                                                                                                                      • Key points
                                                                                                                                                                        • The hassle factor is the main barrier to investing in property
                                                                                                                                                                          • Figure 44: Attitudes towards property investment, December 2014
                                                                                                                                                                        • One in four people would need a mortgage in order to finance a buy-to-let
                                                                                                                                                                          • Figure 45: Attitudes towards property investment among potential investors, December 2014
                                                                                                                                                                      • Appendix

                                                                                                                                                                        • Value forecast – best and worst case scenarios
                                                                                                                                                                          • Figure 46: Forecast of new buy-to-let advances – best- and worst-case scenarios, at current prices, 2014-19
                                                                                                                                                                        • Volume forecast – best and worst case scenarios
                                                                                                                                                                          • Figure 47: Forecast of the number of new buy-to-let mortgages – best- and worst-case scenarios, at current prices, 2014-19

                                                                                                                                                                      Companies Covered

                                                                                                                                                                      • Bank of England

                                                                                                                                                                      Buy-to-let Mortgages - UK - March 2015

                                                                                                                                                                      £1,995.00 (Excl.Tax)