- 25 YEARS OF BUY-TO-LET
25 YEARS OF BUY-TO-LET
How buy-to-let upturned Britain’s property market
A new kind of mortgage in 1996 sparked a love affair with property investment and helped to create millions of landlords
Twenty-five years ago this week, the first buy-to-let mortgage was taken out. This seemingly insignificant financial instrument helped to kick-start the decades-long rental boom, ushered in Britain’s love affair with investing in property and redefined the modern housing market.
When the buy-to-let mortgage first launched in 1996 there were just shy of two million private renters in England, according to analysis from Hamptons, the estate agency. By last year this had soared by 122pc to exceed 4.4 million.
This new mortgage offered everyday investors the opportunity to become landlords. Many were quick to embrace buy-to-let as part of their retirement planning and added the perceived security of bricks and mortar to their pension pots. Lenders, however, took more convincing.
At its inception only two lenders offered the new mortgage, said Robert Jordan, former president of ARLA Propertymark, a trade body.
“Gradually the penny dropped and the number of lenders in the buy-to-let space rose hugely, in turn increasing competition and making it cheaper for landlords to borrow,” he said.
When the sector first opened up to amateurs, there were two types of landlord: the “dinner party” kind and the “real” property investor, according to Mr Jordan.
The former, characterised by a desire to “make money quick”, would later fall by the wayside against a backdrop of increasing regulation.
But longer-term investors who weathered punishing tax changes have been rewarded with high yields and an underlying asset that has shot up in value thanks to years of house price growth. The average house in July 1996 cost £58,854, according to Land Registry data. In July this year, it was more than four times higher at £256,000.
The early boom
The fledgling years of the buy-to-let mortgage coincided with the first 10 years of Tony Blair’s Labour government.
Despite his party’s traditionally anti-landlord sentiment, the private rental sector flourished. Between 1997 and 2007, the number of renters rose by 29pc because of a series of lenient tax policies.
Television shows such as Property Ladder and Homes Under the Hammer stoked the boom, said Phil Stewardson, a landlord. “When Sarah Beeny took to TV in the early 2000s, everyone wanted to buy a run down project, do it up and rent it out.”
Britains 25 year Love Affair with Buy-to-Let……
1996 Buy-to-let mortgages introduced to consumers, sparking a boom in sales and introducing hundreds of thousands to property investment. Many see it as a new alternative to a pension
1997 In the early days of the Blair Government, restrictions around assured shorthold tenancies are removed, making it easier to let properties
2000 Mortgage interest relief at source is abolished for homeowners, but landlords get a tax break and can still claim it as a business expense, making BTLs very tax efficient
2006 Private rented households rise 29pc in a decade, with landlords inspired by TV shows such as Sarah Beeny’s Property Ladder
2008 The financial crisis hits, with many landlords forced into negative equity, selling at a loss
2010 In the aftermath of the crisis demand for rentals rises, pushing up rents to pre-crash levels
2016 The crackdown starts: three percentage point stamp duty surcharge introduced
2017 Tapering of mortgage interest tax relief on BTLs begins, ending in 2020
2020 Pandemic hits, with tenants struggling to pay rent and evictions paused
2020-21 Stamp duty holiday offers big savings to landlords
2021 Rental demand and rents soar
Vanessa Warwick, 59, first became a landlord in 1992 when she was working as a presenter on MTV in London. She fell into the profession by accident, renting out her studio flat in the capital when a defective lease meant she could not sell it. Since then, she has built a portfolio of properties across the UK.
“The buy-to-let mortgage took property out of the domain of the wealthy, into the arena of the masses, and has helped millions of people to use it as a vehicle to create significant wealth outside of the normal routes,” she said.
The real boom came after the 2008 financial crisis. Those landlords who were not forced into negative equity and survived the crash were rewarded by a boom in tenant demand, and consequently rising rents. The number of renters increased by 74pc in the decade between 2007 and 2017.
During this time, home ownership among under-45s declined steeply. In 2003-04, before the crisis, 64pc of under-45s owned a home, according to the English Housing Survey, but by 2015 this had fallen to 45pc. Equity-rich landlords, who were buoyed by low taxes, high yields and soaring house prices, gobbled up properties, expanding their portfolios. But, this would come back to hit the whole sector.
After the boom came the crackdown. Labour’s lax approach to buy-to-let helped the sector soar, so it was a surprise that it was the Conservatives who clamped down on landlords. The idea behind squeezing investors’ profits was to force them from the market and free up properties for first-time buyers.
Since 2016 landlords have had to pay a three percentage point stamp duty surcharge on buy-to-let purchases. This change, and the tapering of mortgage interest tax relief, is thought to have forced a quarter of a million to sell up and exit the market entirely.
These punishing tax changes and ever-increasing regulations are the biggest pitfalls cited by property investors. Landlords in England must now abide by 168 pieces of legislation, a rise of 40pc over the past decade, according to the National Residential Landlords Association, a trade body.
Angus Stewart, of Property Master, a buy-to-let broker said: “A much heavier regulatory burden, and changes in how buy-to-let rental income is taxed, have squeezed out hundreds of thousands of smaller landlords and concentrated the private rented sector in a smaller number of hands.
“We see this ratchet up each time the Government introduces a new tweak to taxation or brings in a new layer of regulation.”
Rise of the professionals
Landlords have increasingly turned to incorporation in an attempt to navigate tax changes.
Some 33,000 landlords set up new buy-to-let companies between January and August this year, more than triple the amount that did the same in 2015, according to Hamptons. There are now 258,000 incorporated buy-to-letters in Britain, compared with 133,000 in 2015.
Investors also face harsher mortgage rules brought in after the financial crisis. The costs are higher too, thanks to the tax rises and regulation, further shutting out amateurs. “I think the biggest challenge for landlords now is the amount of cash required for each purchase,” Ms Warwick said.
“When I was starting out, there were mortgages where you didn’t need to put in a deposit, or developers offered ‘gifted deposits’, meaning the landlord’s financial input was much less than is required today.”
Despite a growing rulebook designed to protect tenants, thousands of rogue landlords still operate in Britain. It is an issue that Mr Stewardson warned was being ignored by government policy.
“The buy-to-let sector is over regulated but under enforced, so there are some really awful landlords out there who take no notice of any of the rules,” he said. “The reality is most of the regulations wouldn’t be required if someone was actually responsible for enforcing the basics,” he said.
Mr Stewardson first became a landlord, with his brother, Mark, in 1995. They intended to build a portfolio of 10 properties as a pension pot. In the 26 years since, their company, Stewardson Developments, has bought some 400 properties, which they renovated to rent out or sold on.
A promising horizon
Despite high taxes and a labyrinthine rulebook, buy-to-let remains hugely popular and potentially very profitable. The market has had a recent revival thanks to savings made under the stamp duty holiday, with rising rents bolstering returns.
In February this year, before the initial stamp duty deadline, the share of sales conducted by landlords peaked at 14pc, Hamptons found. This was the highest share since the tax-fueled exodus began in 2016.
They were drawn by the extraordinary rental market that emerged as Britain reopened after the pandemic. In July this year, the North, East, South West and South East of England all recorded double-digit growth in rents. Nationally, rents rose by 6.2pc compared with the same month last year.
Investors have a greater choice of funding too and record low rates. Richard Rowntree, of Paragon, the lender, one of the first to offer buy-to-let mortgages in 1996, said: “Borrowing in the early days of buy-to-let was more expensive because interest rates in the mid-1990s were much higher.”
The proportion of landlords buying with a mortgage has steadily increased amid strong house price growth
Cash buyers will need sizeable funds thanks to rising house prices
In the past 10 years alone interest rates on buy-to-let deals have almost halved, from 5.61pc in 2011 for a five-year fix to 3.25pc now, according to data firm Moneyfacts.
The majority of landlords still use cash to fund their purchases, according to Hamptons, but the proportion of those using a mortgage has increased in recent years.
Whilst this can be partially attributed to cheaper borrowing and a greater choice of deals, rising house prices have meant investors need help breaking into the property market.