Buy-to-let boom: A David vs. Goliath story

With so much change affecting the property investment landscape, the market is in a position of radical flux – for example, a recent Times article suggested that 86% of tenants do not feel they will ever save more than a 5% deposit for their first home.

In addition to this, with the return of stamp duty, first-time buyers of a home worth £400,000 in England are being smacked with bills of £5,000. The shifting goalposts have, unsurprisingly, made it harder for some buyers to realise their property dreams.

However, despite the increased hardship for some, the market is seeing a new playing field develop. For those well-poised to capitalise on the opportunities presented, the Goliaths are increasingly finding themselves towering over their rivals.

The Goliaths in this tale are the extensive portfolio buy-to-let investors.

Recent government figures revealed that buy-to-let investors and second home buyers now pay almost half of the entire stamp duty revenue going to HM Revenue & Customs each year.

The buy-to-let boom

This trend has been exacerbated by two factors caused by the pandemic.

Firstly, the phenomena of previously considered remote bolt holes now being snapped up by investors who continue to capitalise on the UK staycation craze.

And now, in the wake of the pandemic, a supply and demand dynamic plays out between the lack of rental properties vs. the sky-high tenant demand created by the stalling buying mobility.

This complex power play has not gone unnoticed, with coastal resorts such as Whitby and Brighton introducing caps on second home ownership to prioritise local first-home buyers.

The increased popularity in buy-to-let investment is something that we’ve seen at Crystal Specialist Finance, too with a 28% increase in buy-to-let business in H1 2022 compared to H1 2021.

In addition, buy-to-let deals represented 33% of our completed business for the year so far and we expect that growth to continue.

What about first-time landlords?

Despite our spiralling current inflation rate, the property price index is historically way above inflation. Even when met with the financial burden of meeting regulatory requirements, bricks and mortar is still king for many; providing an excellent income stream.

This is why we’re seeing such rewarding opportunities for the professional portfolio landlord at the moment, but it doesn’t mean all landlords are created equal.

What about the underdog in this tale?

First-time landlords are just as likely to be adversely impacted by the cost of living crisis, with the added financial stress of meeting the legal requirements that come with being a buy-to-let owner.

From gas and electrical safety certificates to insulation and smoke alarms that have a carbon monoxide detector, to keeping their accounts; landlords have lots of additional expenses to meet.

And that’s without the added impact of the Rental Reform White Paper and predicted changes to EPC regulations.

Needless to say, there are a lot of monetary barriers to becoming a first-time landlord.

Removal of stress tests

It was welcomed that borrowing became easier for many as the Bank of England removed the 3% mortgage stress test from 1st August 2022.

Implemented originally in 2014 following the financial crisis, lenders had been required to carry out a particular set of ‘stress tests’ on each mortgage application as a way of ensuring affordability at higher interest rates.
However, for buy-to-let investors and landlords, the stress tests are different.

Often, lenders stress test applications against mortgage rates of around 6%, in order to ensure landlords could afford repayments, despite the fact that the actual interest rate may be lower.

As well as these mortgage stress tests, buy-to-let lenders also require a buffer of 125% and most now apply 145%. This means the rental income must be at least 125% (145%) of mortgage payments each month. This is also known as the Income Cover Ratio (or ICR).

Getting help from a specialist

Increased mortgage stress tests and ICRs from mainstream buy-to-let lenders are now holding some prospective landlords back - leaving brokers and their clients wondering where to turn.

This is where partnering with a specialist can give a boost to an individual’s buy-to-let ambitions, even with adverse factors impacting a case.

A specialist will scan the entire market for you, helping you to navigate obstacles, and can even provide you with access to exclusive or semi-exclusive buy-to-let products with the UK’s best specialist lenders.

Not only that, specialists can guide brokers, alleviate the administrative burden on your day, but also work as a driving force for your case’s completion. And with the current multiple pressures on brokers, an extra pair of hands can be a game changer.

Buy-to-let will continue to boom this year, but it doesn’t have to be dominated by the big portfolio players. If you have a client who has ambitions of becoming a first-time landlord, speak to one of our experts at Crystal today to submit a quick enquiry.