History of Buy-to-Let Mortgages

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“Buy-to-let mortgages” are tailored for individuals aiming to buy a property for rental purposes, typically residential or dedicated to students. While resembling ordinary mortgages, there are notable differences in the structure of buy-to-let mortgages.

The 1990s marked a pivotal decade for the UK in various aspects – culturally, technologically, and politically. Amidst the emergence from a recession, confidence grew with cultural phenomena like Girl Power and Britpop, flourishing in arts, film, and sports. In 1996, buy-to-let was introduced by ARLA, becoming a transformative force in the housing sector. Fueled by increasing tenant demand, it reshaped the private rented sector, offering improved quality, choice, and flexibility. This move, often overlooked at the time, had a profound impact, turning the rental landscape into a more dynamic and tenant-friendly environment over the past quarter-century.

History

Before the Housing Act of 1988, individuals becoming landlords were limited, mainly consisting of professional landlords or those capable of cash payments. The Housing Act, with its assured shorthold tenancy provision, marked a significant shift, ensuring landlords had confidence in fixed-term occupancies.

In the early 1990s, recession led to a housing market downturn, causing plummeting prices and negative equity. Unemployment resulted in property losses for those who heavily borrowed during the previous decade’s boom. The rented sector faced challenges, exacerbated by the Right-to-Buy scheme transferring socially rented houses to owner occupation. The Housing Act responded with legislative changes, boosting Private Rented Sector (PRS) investment to meet escalating demand for rental properties.

The BTL mortgage product, a collaboration between the Association of Residential Letting Agents and lenders like Paragon Bank and NatWest, was introduced on September 24th, 1996, specifically aimed at supporting the private rent sector (PRS) and helping existing landlords expand their portfolios. Before its launch, landlords relied on commercial mortgage terms. While introduced in 1996, buy-to-let’s popularity surged in the 2000s. Between 2000 and 2007, total advances rose from £3.9 million to £45.7 billion, with buy-to-let mortgage advances increasing from 48,400 to 346,000. The 2008 financial crisis significantly impacted BTL mortgages, leading to a decline from £45.7 billion to £28.5 billion. While the market recovered post-2010, it never reached pre-crisis levels.

The buy-to-let market’s success hinges on tenant demand, notably from the ‘generation rent’ demographic, comprising 18–40-year-olds priced out of the housing market due to escalating house prices compared to inflation. This generation faces financial constraints due to high living costs, student loan debt, and wage stagnation. For property investors, this underscores the enduring appeal and potential longevity of the buy-to-let market.

Private rented sector

As of July 2021, Savills research indicates that the UK Private Rented Sector (PRS) was valued at £1.338 trillion, encompassing both mortgaged and non-mortgaged rental properties. The category of ‘decent’ homes in this sector, as defined by the government, increased from 53.2% in 2006 to 76.7% in 2020. Over the past 25 years, the PRS has nearly doubled, accommodating around 13 million private renters. Landlords face contemporary challenges such as evolving legislation, including the 2016 introduction of a three percent stamp duty surcharge and the removal of tax relief on mortgage interest in 2017. The pandemic has further impacted landlords, leading to financial strains and efforts to recover rent arrears. Propertymark members highlight a current surge in prospective tenants, contrasting with a gradual decrease in rental stock.