Evolving opportunities in the buy-to-let market

Evolving opportunities

Key takeaways

  • Demand in the private rented sector is rising but supply is falling, leading to the biggest increases in rents for 13 years
  • The Covid-19 pandemic has changed tenants’ preferences, with people looking for homes with more space and in commuter zones, as well as in city centres
  • The number of buy-to-let mortgage products available has jumped by 40% in the past year
  • There has been a steep increase in product availability for first-time landlords
  • But interest rates on buy-to-let mortgages are starting to rise, so clients wanting to enter the sector should move quickly

With intense competition in the residential mortgage market, lenders are turning their attention to the buy-to-let sector. Product choice has soared during the past 12 months, while interest rates on buy-to-let mortgages have held steady or even fallen. There has also been a significant expansion in ranges for first-time landlords, creating opportunities for would-be investors in bricks and mortar.

The fundamentals of the private rented sector are also strong, with rising demand and a significant shortfall in supply leading to higher rents and shorter void periods. But tenant preferences have changed during the pandemic, and it is important that clients looking to buy their first investment property or expand their portfolio understand the dynamics in the market.

Here’s what you need to know about the current situation in the buy-to-let market.

Rising demand, but not enough supply

The private rented market took a hit during the Covid-19 pandemic as people deserted city centres and young renters returned home to live with their parents.

But with restrictions now lifted, and companies encouraging workers to return to the office, demand is increasing again. In fact, property website Zoopla recorded a 76% jump in the number of people looking to rent a home in January, compared with the same month between 2018 and 2021.

The surge in demand comes at a time when the availability of homes in sector is falling. The number of units available to rent has been on a steady downward trend in the past few years following changes to mortgage interest tax relief and the introduction of the 3% stamp duty surcharge for people buying an additional property. The situation caused many landlords to ditch underperforming properties or opt not to expand their portfolios.

The Royal Institution of Chartered Surveyors has recorded a consistent contraction in supply since 2017, while Zoopla’s Rental Market Report saw a 39% drop in availability in January compared with the same period of previous years.

This long-term trend has left the private rented sector facing a significant shortage of properties. In a recent report economics consultancy Capital Economics estimated that the UK will need 227,000 homes to be added to the private rented homes each year to meet growing demand.

Rent increases hit a 13-year high

Unsurprisingly, this mismatch between supply and demand is putting significant upward pressure on rents, which are currently rising at their fastest rate for 13 years, according to Zoopla. Average rents across the UK now stand at £969, after increasing by 8.3% during the past year.

There is further good news for landlords, as intense competition between potential tenants has led to significantly shorter void periods. It is taking an average of just 14 days to rent a property, down from three weeks in the final quarter of 2020.

Going forward, the shortage of rental stock is expected to drive further rent rise, although at a slightly more modest pace of 4.5% a year, according to Zoopla’s analysis. It calculates that entrants can expect to make an average yield of 4.86%.

With house prices still rising at a double-digit rate, and savings accounts failing to provide a real return due to high inflation, the buy-to-let sector is once again on investors’ radar.

But tenants’ preferences have changed

For clients thinking of jumping into the buy-to-let market, it is important to understand that tenant preferences have changed as a result of the Covid-19 pandemic.

As has been the case for those purchasing a home, successive lockdowns have led to renters looking for more space. This includes both internally, such as a spare room that can be used as a home office, and externally in terms of a garden.

The adoption of hybrid working practices by many companies has also driven demand for properties in commuter belts, where space is more readily available and more affordable than in city centres.

The city centre rental market took a big hit during the pandemic, with inner London the most adversely affected. But as workers are encouraged to return to the office, demand for properties in cities centres is increasing again, although it is not yet in line with pre-pandemic levels.

Expanding mortgage choice

In further good news for investment landlords, competition among lenders in the buy-to-let sector is showing signs of increasing. After a retrenchment during the early stages of the Covid-19 pandemic, when many products were withdrawn, the total number of deals available has soared by more than 40% year-on-year to stand at just over 3,300.

The expansion in choice is particularly noticeable in the higher loan-to-value (LTV) ranges. Availability for those looking to borrow 80% of a property’s value has more than doubled, to account for just over one in three products. Choice in the 75% LTV range is up 45%, while availability in the more niche 85% LTV sector is back to pre-pandemic levels.

Average interest rates on two-year fixed rate products have also held steady year-on-year, despite the increase in the Bank of England Base Rate from a record low of 0.1% to 0.5%. Meanwhile, rates charged on higher LTVs have actually fallen during the period. For example, the average rate on an 85% LTV two-year fixed rate buy-to-let mortgage has dropped from 5.52% to 4.69% during the past year, in a further sign of competition in the sector.

Opportunities for first-time landlords

Another bright spot in the buy-to-let mortgage market is that lenders appear to be keen to attract first-time landlords.

The number of mortgages available to first-time landlords has nearly doubled during the past year, rising from around 1,300 to more than 2,200. Overall, nearly two-thirds of products now cater to this sector. The premium charged to this sector has also narrowed to 0.26%, down from 0.34% 12 months earlier.

Holiday let market

The holiday let sector is also benefitting from an increase in products. After shrinking to just 74 different deals in August 2020, those looking to buy a property to rent out as a holiday home now have 263 different products to choose from.

Interest rates charged on the products are also coming down. The cost of the average fixed rate deal now stands at 3.8%, down from 3.92% in January and 4.14% in September last year, despite the recent increases to the Base Rate.

But don’t delay for too long

The expansion in product choice, combined with the increased availability of higher LTV mortgages and competitive interest rates, demonstrates lenders keenness to do business in the buy-to-let sector. But if clients are interested in purchasing a buy-to-let property or remortgaging one, they should act now.

While the year-on-year trends are all positive for this sector of the mortgage market, there are some signs of tightening following the recent back-to-back interest rate rises by the Bank of England’s Monetary Policy Committee. Around 200 products have been withdrawn during the past month, while average rates have also edged higher.

With further increases to the Base Rate predicted, expect lenders to continue rationalising their ranges, and interest rates on buy-to-let products are only likely to be moving in one direction…

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