Evolving opportunities in the buy-to-let market

Buy-to-let: A blue and purple vector of a person standing on cogs and using a telescope to see into the distance.

Buy-to-let: Key takeaways

      • The number of buy-to-let mortgage products available has jumped by 40% in the past year
      • 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

      • 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

    Attention is turning to the buy-to-let sector as competition within the residential mortgage market intensifies. 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. Rising demand and a significant shortfall in supply are 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.

    The subsequent lifting of restrictions, coupled with many companies encouraging workers back to the office, contributed to demand increasing. In fact, property website Zoopla recorded a 76% jump in the number of people looking to rent a home in January 2022. That’s compared with the same month between 2018 and 2021.

    The surge in demand comes at a time when the availability of homes in the sector is falling. The number of units available to rent has been on a steady downward trend in the past few years. This has been 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 privately 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. These are currently rising at their fastest rate for 13 years, according to Zoopla. Average rents across the UK by Q4 2022 stood at £935 pcm – a 22% rise year-on-year.

    There is further good news for landlords, as intense competition between potential tenants has led to significantly shorter void periods. In the second half of 2022, void periods were just 16.8 days a year.

    Going forward, the shortage of rental stock is expected to drive further rent rise. This will be 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’ radars.

    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 city centres is increasing again. However, 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 pandemic, when many products were withdrawn, the total number of deals available has soared by more than 40% year-on-year to reportedly stand at just over 3,500 at the start of 2022.

    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 increases in the Bank of England Base Rate from record lows.

    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, rising from around 1,300 to more than 2,200 by early 2022. 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. Many fixed-rate deals have dropped to below 5%, 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. This follows 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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