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Buy-to-Let Mortgage Market 2022


As we begin a new year, our Mortgages Managing Director, Richard Rowntree, takes a look back at 2021 and how the industry has risen to some substantial challenges and managed demand not seen since before the global financial crisis.

We headed into the festive break with an all-too-familiar air of uncertainty as the impact of the Omicron variant is still unclear, but I think it is safe to say that 2022 will be another eventful year. Here are some of the key themes that I think will influence the buy-to-let mortgage market and private rented sector (PRS) over the coming twelve months.

A rise in remortgage business

A key theme for brokers, lenders and landlords in 2022 will be the rise in remortgaging.

New underwriting standards, introduced by the Prudential Regulation Authority (PRA) in January 2017, combined with the low interest rates of the time to increase the appeal of mortgages fixed over longer terms.

With industry data showing a threefold increase in the number of five-year fixed rate mortgages written between December 2016 and January 2018, we're anticipating a strong year for remortgage business as many of these loans mature.

Fears of soaring inflation have led many to expect the Bank of England to further increase the base rate of interest throughout 2022 so borrowers will be keen to lock-in another loan sooner rather than later, offering an opportunity for brokers to hit the ground running after the festive break.

Purchase activity is not likely to hit the highs of 2021, so remortgage presents an opportunity for the sector.

Demand exceeds supply

One of the most pressing issues is the shortage of stock available to buy for both owner occupiers and buy-to-let landlords.

Focusing on the private rented sector, Hometrack's Q3 Rental Market Report reveals the extent of the issue; the availability of properties to let is 43% below the five-year average while tenant demand is 55% above the average, contributing to a 13-year high in rental inflation.

While industry data suggests that the shortage of stock can be traced back to midway through the last decade, when Government policy made (PRS) investment more onerous and less profitable, the imbalance between supply and demand has been exacerbated by the pandemic. With Omicron resurfacing rumours of lockdown and around a third of employees now able to work from home to some degree, the re-thinking of what we want in a home is likely to continue throughout next year and this demand will continue the pressure on supply.

Solving this problem will require a multi-faceted solution and, while efforts to build more homes should clearly continue, there is also evidence highlighting how more could be done to ensure that people live in properties that best meet their needs.

The recently published English Housing Survey shows that around 9.1 million households are living in under-occupied homes, something that is much more prevalent in the owner-occupied market compared to the PRS.

With the Stamp Duty holiday proving that the tax is a barrier for buyers, looking at how this is applied could help encourage some to downsize which, in turn, would free-up larger homes suitable for families or groups of friends across both the privately rented and owner-occupier tenures.

Build-to-rent has a role to play, but is not the answer

Build-to-rent is seen by some as a solution to the stock shortage.

The most recent figures reveal that there are now 205,525 build-to-rent homes in the UK and research carried out by Savills for the British Property Federation revealed that between Q3 2020 and Q3 2021, the number of completed build-to-rent developments jumped by 26% from 50,798 to 63,950.

With a further 8% increase in the number of projects under construction and 10% more in planning over the same period, alongside news that the sector is attracting institutional investment from the likes of Lloyds, L&G and Goldman Sachs, the growth looks set to continue into 2022 and beyond.

With many developments offering modern, quality furnishings and facilities such as on-site gyms and bars, accommodation commands a premium price tag and often appeals to younger renters. Some investors have expressed an interest in extending their proposition to cater to more modest incomes and families but instead of posing a threat to buy-to-let investment, I feel that the two tenures can successfully coexist.

While not possessing the purchase power of institutional investors, private landlords can be more agile and quick to adapt to market conditions or localised trends. PRS landlords also have the ability to provide a more personalised service, something we have seen during the pandemic with many landlords taking a pragmatic and individualised approach, working with tenants to overcome things like rent arrears. This is supported by Paragon research that revealed that 68% on tenants said that they have a positive working relationship with their landlord, 80% said that their landlord is easy to contact and 65% report that their landlord makes repairs promptly.

The continued growth of green

The need to create a more sustainable future has taken on extra urgency over the past year. This is particularly true of the PRS due to Government's proposals requiring all property being let for new tenancies to achieve an EPC rating of A-C by 2026, extending to all rented properties by 2028.

By this time next year that deadline will look worryingly close, so I see efforts to help landlords achieve this really gathering pass throughout the next twelve months.

Earlier in the year, Paragon was the first lender of its type and one of only a handful in the wider mortgage market to launch products that offer preferential terms for properties rated EPC A-C, incentivising landlords to boost the proportion of energy efficient properties in the PRS.

The strides that have been made in improving the sustainability of the PRS have mainly been driven by the injection of newer, more energy efficient homes, so there is a real benefit to providing attractive finance to enable this to continue.

That said, we know that this isn't enough and that the stock profile means many older properties will need to be brought up to date with the latest heating and insulation technology. Many landlords will need finance for this retrofitting so I foresee lenders looking at innovative ways to support this.

This article first appeared in Mortgage Strategy