The UK Buy-to-Let market is on a continuous upward swing, with investors representing 14.5% of all mortgage borrowers in the third quarter of 2015.
On its surface, the popularity of the BTL market might be difficult to understand, given that property prices are hardly stable and rent demands are low. Add these to the difficulty that some tenants could pose. So what is the increase really all about? Simply: the leverage the mortgage rate offers.
Here’s how the average BTL investor calculates it. You make the minimum deposit required by your lender, invest in a BTL property and sit back while someone else pays the mortgage through their rent. As long as full rent covers the monthly mortgage levy, you’re fine. So, after 20 or 30 years, the mortgage is fully settled, but the house belongs to you.
Rising house prices fuelled by imbalance in demand and supply
New statistics released in February show that rent prices are steadily rising as demand continues to outpace supply. According to Halifax, house prices have increased by 9.7pc since February 2015. This contrasts with data from rival lender Nationwide which pegged it at a 4.8pc annual increase.
Nationwide also reported a monthly rise of 0.3pc in house prices, but Halifax stated that the rates decreased by 1.4pc. Halifax attributed the increase to a significant imbalance between supply and demand, and Nationwide associated it with a rush to buy a second home or BTL properties before the April 1 deadline when a 3pc increase in stamp duty would be imposed on those in that category.
Although the data crunching may not be detailed as they derive from their mortgage operations, the statistics nonetheless provides a rough indication of the loopholes in the BTL market and danger it portend for the economy.
Also in February, ratings agency, Standard and Poor’s reported that low interest rates were being transferred to consumers, forcing them to borrow more, which in turn is pushing prices up. It forecasted house prices will rise by 5pc in 2016, matching similar increases in Germany and Ireland.
Governmental limits
Worried about the unabated growth of the Buy-to-Let market and the potential consequences on the economy, the UK government has begun to consult on new powers that will authorise the Bank of England to have a firmer control of the market.
Recently, the Bank was given extra powers to better regulate the residential mortgage market, which could now be applied to peg and control investor borrowings for BTL properties. The Bank of England governor, Mark Carney, has already expressed worry that the current situation might lead to a market bubble that would force prices. He said this could destabilize the economy when landlords panic and begin to sell in large numbers. The government is now mulling plans to order banks and building societies to limit their borrowings to landlords. This could be done by weighing the loan request against the value of the property, or calculating if the landlord’s rent covers his or her mortgage payments.