The buy-to-let mortgage has finally come of age. This year marks the 18th anniversary of the Association of Residential Letting Agents’ (Arla’s) initiative to encourage more people into buy-to-let investing, and it has come a long way since then.
Although buy-to-let existed before the Arla scheme, borrowers were subject to punitive interest rates if they wanted to own more than one property and rent one out. It was this initiative run in conjunction with mortgage lenders that first promoted it as a mainstream option by working to create manageable interest rates and create a landlord culture.
A strong UK housing market has given a promising backdrop to buy-to-let investment. On top of this, as more young people are priced out of home ownership, the rental market has expanded, creating an opportunity for landlords to take advantage.
Buy-to-let offers the opportunity to earn a profit in two ways: through rental yield and capital growth. Both have the potential to provide returns in the current climate if the right property is selected in the right location.
Labour leader Ed Miliband has added a degree of uncertainty to the future of buy-to-let, by announcing plans to cap rent increases and introduce longer term tenancies should Labour win the next general election. Under these plans, tenants’ rent would be based on market value and a review of that rent could only take place once a year. Should landlords want to raise rents, they would have to fall within limits set by legislation, which would inhibit what landlords are able to charge.
Why you should
As an asset, buy-to-let property is extremely high achieving, as shown in Chart 1.
Research commissioned by Paragon Mortgages in partnership with Wriglesworth Consultancy showed some fairly outstanding figures for the performance of buy-to-let, both with a 75 per cent loan-to-value mortgage, and without a loan in the 18 years since the launch of the buy-to-let mortgage initiative. Both kinds of investment outperformed UK commercial property, the FTSE All Share index, Bloomberg/EFFAS gilt index and cash at one month Libor.
One of the interesting outcomes of the study was the data around the disparity between buy-to-let purchases carried out entirely in cash, and those who borrowed 75 per cent of the purchase price. If bought in cash, the investment earned a compound annual return of 9.7 per cent, but a 75 per cent loan-to-value (LTV) mortgage would have given an impressive compound annual return of 16.3 per cent. The scenario of the 75 per cent LTV takes into account repayment of interest, since most buy-to-let loans are interest-only. In terms of return on initial investment, this is an advantage, but still means having debt.
