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Happy birthday to the buy-to-let mortgage

Updated: Dec 8, 2021

The buy-to-let (BTL) market is 25 years old this year and has moved from humble beginnings to become a multi-billion-pound sector with more than two million mortgages outstanding.

In July 2021, the total value of all BTL mortgages was £278.6 billion, UK Finance figures show. Last year slowed a little because of Covid lockdowns but this year has been busy, no doubt boosted by the stamp duty holiday. There was a big rise in lending in June when the main stamp duty holiday ended and the first seven months of 2021 saw BTL lending reach £27.1 billion. This is looking positive to surpass the £38.1 billion for the whole of 2020.

Demand for rental property continues to rise with the private rented sector (PRS) almost doubling in size since the first BTL mortgages were launched in 1996. Back then the PRS accounted for around 10% of total housing stock but now it’s 19% representing around 4.4 million households, according to the English Housing Survey. The social rented sector is not far behind with 4 million households, which is close to 17% of housing.

The size of the market can also be measured by how many landlords there are in the UK. Data from estate agency Ludlow Thompson shows there has been a 49% increase in the number of buy-to-let landlords over the past five years from 1.8 million to 2.7 million.

Around half of landlords are cash buyers but both amateur and professional landlords can access BTL mortgages and in addition there are second charge BTL options. If landlords want to raise more money they can consider remortgaging but this could mean sacrificing a preferential interest rate. This is particularly prevalent if the landlord is still benefitting from a legacy product with a dormant lender which might mean giving up a low interest rate tracker product. Further advance options are also harder to come by for landlords.

In addition, most landlords have fixed rate mortgages with a high proportion of these secured on longer-term fixed rates so there will be early repayment charges if redeemed before the end of the term.

This is where the second charge BTL mortgage comes in. Landlords can keep their first charge mortgage with its low interest rate or avoid early repayment charges and use a second charge to capital raise. Reasons for this could be to buy more property or to renovate existing property to increase rental yield or simply to raise money for personal or business use.

Another important advantage of the second charge mortgage is that they can be processed quickly. This is useful if funds are needed fast, perhaps for essential or emergency repairs to the property or to put down a deposit on a house bought at auction.

When BTL mortgages were created 25 years ago, it was to fill a gap and their invention opened up the market for property investors. Before that they had to take out commercial mortgages with high rates and low LTVs. In 1996, collaboration between the Association of Residential Letting Agents (ARLA) and a few innovative lenders led to the BTL mortgage which has evolved into the thriving sector we have today.


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