Specialist Lending

Buy-to-let celebrates 15th anniversary

21st September 2011

The Paragon Group of Companies has praised the positive contribution buy-to-let has made to the UK housing market as the sector celebrates its fifteenth anniversary this month.

Buy-to-let was officially launched by the Association of Residential Letting Agents on 24 September 1996 at the RAC Club, Pall Mall. The launch was an industry-wide initiative and included several founder lenders, including Paragon Mortgages and Mortgage Trust, and industry bodies, including the Council of Mortgage Lenders.

Nigel Terrington, Paragon Group Chief Executive, says:

“Buy-to-let has galvanised the rental market over the past 15 years, whilst providing an attractive asset class for property investors. Buy-to-let finance was the catalyst for the revitalisation of the modern private rented sector.

The flow of fresh capital modernised a tired and decaying sector, driving up standards of accommodation and choice for tenants.

“Many argue that the PRS would have died without buy-to-let; it had fallen to around 7% of all housing by the early nineties and there was a lack of finance going into the sector.

"The PRS now provides a home for nearly one in six households and its importance will increase in future years as population growth and housing completions diverge.

"More people are choosing to live in rented accommodation and we must ensure that they have a PRS that remains fit for purpose. The future strength of the buy-to-let market will be central to that.”

Terrington added:

“The PRS makes a great contribution to the UK economy – it facilitates labour mobility and flexibility, provides an income to thousands of small businesses, supports a number of associated industries, such as letting agents and maintenance companies, oils the wheels of the housing market and makes a great contribution to the public purse.”

The history of buy-to-let –key statistics:

- The value of outstanding buy-to-let balances has risen from £5.4 billion in 1999 (the first year the CML recorded the data) to £154.5 billion today. Buy-to-let represents 12.4% of total mortgage outstanding balances

- Since the beginning of 1999, 2.1 million buy-to-let loans have been advanced and there are currently 1.3 million loans outstanding

- The number of properties in the PRS (in England) has risen from 2.1 million in 1996 to 3.9 million in 2010

- The proportion of households in the PRS (in England) has risen from 10.1% in 1996 to 15.6% in 2010

- The number of homes in the PRS classed as 'decent' by the DCLG rose by 59% in the 10 years following 1996

- The proportion of PRS properties in the lowest two energy efficiency bands fell from 46.7% in 1996 to 19% in 2009

John Heron, Paragon Group Director of Mortgages, was at the buy-to-let launch in 1996. He recalls the conception and growth of the market:

“Buy-to-let was developed in response to the surge in demand for rented property following the recession of the early nineties. The problem was a lack of property supply; there was no finance vehicle specifically designed for people investing in rental property. Their only route was the commercial finance markets and these weren‟t suitable.

"ARLA first started talking about the concept in 1995 and, over the course of the next year, we developed the proposal, which was very simple at launch. The maximum loan-to-value was 75% and the rental income had to equate to 150% of the mortgage payment. Though rudimentary, the basic building blocks of buy-to-let lending have not radically changed since launch.

"After launch, it quickly became clear that buy-to-let had a well-defined and needy market and the sector gained ground. Analysis carried out prior to launch identified the need for a much larger private rented sector in the UK, and that the need for buy-to-let mortgages and rented property would grow hand-in-hand.

"Such strong levels of business attracted other lenders to the sector. Competition had some positive benefits for landlords - it resulted in innovation that delivered a wider range of products, whilst criteria also expanded and we saw buy-to-let move beyond its traditional boundaries.

"Largely populated by experienced and professional landlords, it was becoming an "investment product" that more and more first-time property investors would use.

"As the 2000s wore on, the rush for volume on the part of some lenders led to practices that we weren‟t comfortable with. We were, and remain, vociferous critics of property investment clubs and new build city centre properties in areas of low demand, and we argued but-to-let was being confused with property speculation.

"This happened at a time when some lenders‟ controls were woefully inadequate – products emerged that had no affordability requirements at all, some lenders required no physical evaluation of the property and rent was not being properly assessed. It was all looking a little overheated.

"Buy-to-let was often cited as helping to cause the credit crunch – nothing could be further from the truth. It was not buy-to-let that contributed to individual lenders‟ problems; rather substandard lending practices.

"However, as we slowly emerged from the financial crisis it became clear the sector had performed much better than some had predicted. Arrears on buy-to-let proved to be little different than mortgages in general and for some of the more prudent lenders, like Paragon, arrears levels were, and remain, significantly better than market level owner-occupier arrears.

"Today, a new wave of interest in buy-to-let is emerging as lenders look to increase new business levels and improve margins. The mortgage market in 2011 looks very different from the one we had in 2007.

"Not only is gross lending roughly about a third of what it was, specialist markets other than buy-to-let hav
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