Will pension freedoms spark buy-to-let boom?
Brokers say improving market conditions, regulatory shifts and new pension freedoms have combined to make the buy-to-let sector the most attractive lending proposition in 2015.
A string of new entrants have either already joined the UK buy-to-let market in recent months or are planning to do so in the coming months. State Bank of India, which rejoined the sector last year after an 18-month absence, started to distribute through the broker channel last month and fellow Indian-based lender Axis Bank is rumoured to be weeks away from its own launch.
New specialist buy-to-let lender Foundation Home Loans is also close to launching into the market and Council of Mortgage Lenders data shows it is a market in the midst of a resurgence. Since 2009, the market has grown each year up to 2013, when a total of £20.7bn was advanced to landlords.
Tighter regulations placed on residential lending by the Mortgage Market Review have squeezed lenders’ margins, forcing them to consider other sources of revenue such as buy-to-let.
The new regulations were blamed for a dip in mortgage approvals over the summer, while British Bankers’ Association figures published in December showed year-on-year lending by the UK’s six largest lenders fell 12 per cent to £10bn.
Mortgages for Business managing director David Whittaker says: “Lenders who are struggling to match their ambitions with the state of the residential market will be looking to the buy-to-let space to make up for a lull in volumes.”
He adds that greater margins in buy-to-let lending will make it a more attractive market to new entrants.
“Any new lender at the moment will also be focused on buy-to-let quite simply because the returns are greater,” he says.
“If you look at the treatment of buy-to-let loans on a lender’s balance sheet, it is the same risk capital as residential loans but pays a higher percentage and bigger fees, without the regulatory overtones.”
TBMC managing director Andy Young says: “If lenders have been hit in terms of what they can do in the residential side of the market, they will naturally look to buy-to-let, which has really come on in recent years.
”Arrears are down, margins are good and there is an appetite to lend, so anyone new looking to lend in the UK would probably see landlords as their best bet.”
A boon from the pensions reforms?
The pension freedoms announced in Chancellor George Osborne’s Budget last year are another potential gift for the buy-to-let market. Following the announcement that anyone aged 55 or over would be able to access their entire pension pot from April 2015, experts forecast a boom in buy-to-let investment.
Buy to Let Club managing director Ying Tan believes the changes are likely to provide a boost for the market but says pension holders may not have the required risk appetite for investing in property.
He says: “The pension freedoms set to come in will help of course, but I wonder if most pension pots are big enough to buy a property and whether people who have saved into a pension have the kind of risk appetite to take on an investment property.”
However, a Bank of Ireland study in November found that 29 per cent of retirees nationwide were planning to use their pension to buy property.
John Charcol senior technical manager Ray Boulger says: “There is a definite logic to savers using their pensions windfall to invest in property. House prices will continue to rise despite the efforts to boost supply, and I think those who are smart enough to save a decent amount over their careers will also see the sense in property investment to gain better yields.”
A cleaner market?
The buy-to-let market has largely “cleaned” itself in the years following the crisis, says Tan, making it a better proposition for lenders. The credit scoring process, in particular, has improved, leading to falling arrears in the buy-to-let market. CML data shows the percentage of buy-to-let loans in three months or more arrears has fallen from 2.31 in 2008 to 0.92 per cent as of 2013.
Tan says: “I’ve been in the market through good and bad times and right now buy-to-let is as strong and as clean as it has ever been, so it makes perfect sense to see lenders joining the market now.
“If margins are best in buy-to-let and arrears levels are low, why wouldn’t you want to get into that market? Often you think if margins are higher than its riskier but if both margins and arrears are favourable, it’s a great time to enter.”