MortgagesJun 25 2020

Buy-to-let is a long-term play

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Buy-to-let is a long-term play

Even since writing this article, something could have changed that has a knock-on effect to the industry — in a positive way or otherwise.

The truth of the matter is that while we might like to predict and look into our crystal balls to see what might happen next, most of the time it is incredibly difficult to determine the short-term impacts, let alone what might happen further into the future.

Take the Covid-19 pandemic and its impact and influence on the UK housing market.

We can undoubtedly determine that change is happening as a result of it in areas like transaction levels, house prices — nationally and within certain regions and towns — and lending activity, but it’s almost impossible to say just what course they will all take and how the market will ‘land’.

With major parts of the economy having been shut down and the housing market only recently having been ‘opened’, it has been rather strange times.

Key Points

  • It is currently a very changeable situation regarding Covid-19 and the housing market
  • Landlords and tenants are not immune from the changes
  • Landlords who use a limited company have been less in need of a payment deferral

And that’s without looking at how the housing market will work in future — the impact on viewings, the need for PPE, consumer confidence, and dealing with legals.

Landlord participants and borrowers are clearly not immune from any of this.

Far from it, and there has been a lot of speculation about how the private rental sector would react to Covid-19, how large numbers of tenants might be coping with paying rent, how this would impact on landlords, their ability to pay their mortgages, and how the sector would be affected in areas like houses of multiple occupation, which might rely on non-family members/groups living together.

It is a complicated picture and there are no simple answers, especially for landlords who may be trying to weigh up their ability to keep supporting their tenants who are having difficulties with continuing to pay the mortgage and ensuring that they can continue to be active in this space.

There has been a vast amount of press comment on mortgage payment ‘holidays’, but it is clear that for many people this was a saving grace.

Just over three months into the provision of these ‘holidays’, we conducted an extensive analysis of our own mortgage book and the take-up of mortgage payment deferrals, and it has been incredibly informative in terms of seeing where the potential stress points might be for landlord borrowers.

Overall, we found that our buy-to-let borrowers were far less likely to ask for a deferral than their residential counterparts.

There will be a number of different reasons for this, and these decisions, how they work through the system and what happens post-deferral, will reshape the future of buy-to-let market.

Professionalism

Over recent years we have seen the professionalisation of the sector with far fewer ‘dinner party landlords’ now active, and we believe the fact that landlords are more likely to have coped during this period is because of the way they invest, the way they operate their portfolios and the money they have been able to put away in order to cope with, what is essentially, a ‘rental void’.

Our analysis shows that those landlords who borrow through limited company vehicles are less likely to have requested a deferral than their individual landlord counterparts.

While those more likely to have needed a deferral were those landlords with larger loans to service and with a larger rental income needed in order to cover the mortgage — again, this seems like an obvious result given that the impact of a tenant being unable to pay their rent will be far greater on those landlords who have larger loans.

Interestingly, at present, HMO landlords are no more likely to request a deferral than non-HMO landlords. There are different arguments about HMOs in the future, but I believe they will represent growth opportunities for landlords.

Landlords in general appear to have displayed a very reasonable and pragmatic approach to mortgage payment deferral usage.

If they have not felt the need to ask for one, they have not, and this has been the case since the government announced a further extension for those currently not paying their mortgage, or those who might still want a deferral, up until the end of October.

Of course, we are still a long way from knowing how this might all play out in the longer term.

What we do know, however, is that even in these first few weeks of post-lockdown, we have seen existing landlords seeking to add to portfolios and, where necessary, refinancing existing properties within their portfolios in order to free up money to use as deposits.

Investment proposition

The notion of property being a good, strong, long-term investment has not gone away and while the pandemic may have made up the minds of what we might call amateur landlords to expedite their move out of the sector, for the most part, the opposite is happening with those who treat this investment as more of a full-time job and/or business.

This latter group tend to recognise that, in the great scheme of things, 2020 is a short period within a much larger investment horizon.

It is because of this that some lenders are offering more variable products without any early repayment charges, because they know that landlord/borrower situations can change, and change quickly.

It may well be that come the middle of 2021, circumstances will have changed significantly, and it will be at this point that borrowers will appreciate their ability to perhaps remortgage without any charges being attached.

Overall, landlords are acutely aware that demand for quality private rental sector properties is only likely to grow as a result of the pandemic; they also know that demand currently outstrips supply, that house prices may be subdued during the rest of this year, and therefore there are opportunities to garner both stronger rental yield and grow capital values by investing now.

Coupled with a responsible approach to their tenants and a long-term outlook, the prospects for buy-to-let remaining a good investment for the foreseeable future look assured.

Jeff Knight is director of marketing at Foundation Home Loans