The ‘Buy-to-Let’ (BTL) mortgage is celebrating its Silver Anniversary (25 years) this autumn.
Isn’t it fascinating that a decision between a group of letting agents and bankers all that time ago to offer BTL mortgages has changed the face of the Fife (and national) property market?
But has it been a good thing? Or has it ruined the dreams of many 20 somethings wanting to get on to the property ladder in the last couple of decades?
Let’s look deeper at the whole story, then I will let you, the reader, decide.
And as soon as the BTL mortgage was launched, it was clear there was an enthusiasm and a need for this mortgage product. So much so the size of the Fife private rented sector has grown exponentially.
According to my analysis …
there are 15,727 private rented homes in Fife, worth £3,011,154,000.
So now we are in 2021, it seems farcical that banks and building societies once thought that properties rented out to private tenants would not create a steady income or increase in value, yet this thought was conventional back in the 1990’s.
It’s no wonder BTL landlords have been given a hard time, with numbers like this.
Yet before we burn every landlord at the stake, let’s just look at the background story.
The Conservatives introduced the right of a council house tenant to buy their own council house in the early 1980s. Fantastic news for council tenants, yet when a council tenant bought their home, that meant that council housing was taken away from future generations to rent and therefore eroding the council housing stock available. Meaning from the mid 1990s/early 2000s, people who would normally be eligible to rent from the council, yet who couldn’t buy, had only one option … rent from a private landlord.
Meanwhile, in the early/mid 1990s we had 15% mortgage interest rates, unemployment rates of 9% and the 1989 housing crash fresh in people’s memories. Repossessions were rife, making home ownership not the most attractive prospect for 20 somethings.
Fife house prices dropped by 3.9% between 1989 and 1993.
This meant as we entered the mid 1990s, the Fife property market entered a period of stagnation. There were many Fife homeowners that bought their home in the property boom of the late 1980s who were disinclined to sell their home for a loss. They were in negative equity (i.e. they owed more than what the house was worth) yet needed to move because of their growing families.
Renting their home out could have allowed them to buy another home for their growing family, but most banks and building societies were still mostly unreceptive to the notion of these homeowners becoming accidental landlords. Most mortgage terms and conditions usually included clauses that prohibited homeowners from renting out their homes.
So, with growing demand from potential tenants, supply reduced from the sale of Council houses and many homeowners in negative equity, all bound up by the semi-deregulation of the private rented sector with the Housing Act 1988 – you can see that the BTL mortgage came along at the right time.
Early take up of BTL mortgages was slow in the first couple of years.
By the Millennium, according to the Council of Mortgage Lenders, there were just over 120,000 BTL mortgages, with a total value of £9.1 billion.
Yet as we entered the 2000s, they really took off, with every man and his dog jumping onto the BTL bandwagon. So much so that today in the UK, there are …
4.4m private rented homes, 2.1m of them with BTL mortgages
totaling £234.1bn, which is 11.9% of the UK’s GDP!
That’s more than a 1,650% increase in the number of BTL mortgages to landlords and a 2,470% increase in the value of those BTL mortgages.
Since 2001, the number of privately rented households in the UK has grown from 8.3% to 19%.
On the face of it, you could say with the growth of these BTL landlords with their cheap BTL mortgages and often unkempt properties, it has pushed potential homebuyers into squalor. Yet, let’s look a little deeper.
Most Fife landlords are very fair with their Fife tenants providing them with clean, well presented and affordable housing. Of course, there are the rogue landlords but with TV shows such as ‘Landlords from Hell’, the British public are given a distorted and uneven view of private landlords as a whole.
Private sector landlords have played a critical role in providing homes to millions of Brits in this country, let me expand.
The UK population has grown by 405,000 people per year (for the last 20 years), yet only 22,750 council/social houses have been built per year in the same time frame.
If it wasn’t for the private rented sector, who would’ve housed all the extra people in the country over the last 20 years?
What about the exorbitant rents? Would it surprise you that rents have risen below inflation between 2008 and 2019?
Also there has been a drive to tax BTL landlords more comprehensively and regulate the private rented sector to develop better housing conditions for tenants.
Unlike owner-occupier homes, tenants get the benefit of new regulations from Gas Safety Checks and Electrical Safety Reports. Also, BTL landlords will need to improve their Energy Performance Certificate Rating to at least a D rating by the end of March 2022 for all new tenancies, and by end of 2025 for all existing tenancies, all at no cost to the tenant and directly saving them money on their heating costs – something that is very important considering the recent rises in gas prices.
Fife landlords have also had to pay more tax on their Fife BTL properties, paying 4% Land and Buildings Transaction Tax supplement for the last 5 years, and higher rate tax relief on mortgage interest was taken away four years ago. Capital Gains tax has been changed and the 10% wear and tear allowance on furnished properties has been removed in the last 10 years all to generate more money for the exchequer.
Landlords have also had to deal with the financial fallout of the pandemic. It is estimated 1 in 5 tenants in the private rental sector have some form of rent arrears.
Interestingly landlords that don’t use a letting agent to manage their property are 272.5% more likely to be 2 months or more in arrears.
Also, evictions for rent arrears were banned during the pandemic, meaning some tenants ran up arrears of 12 months or more. According to the National Residential Landlords Association (NRLA), this has left around 210,000 private tenants in the country facing a court order for rent arrears. That would equate to …
844 Fife private rented households with a court order for arrears.
The idea that Fife landlords are middle-class establishment types who are out to take advantage of Fife tenants who can’t afford to buy their own Fife homes is, in my opinion, just wrong.
Of course, there are some rogue Fife landlords, yet there are plenty of rogue tenants. Just because you are a Fife landlord, it doesn’t mean you are quaffing Champagne, driving a Ferrari and rolling in cash.
2,825 Fife landlords own just one BTL property.
And just under half of those use their rental income to supplement their pensions, and according to the NRLA, a third of landlords have a gross income (excluding income from the BTL property) of less than £20k per annum!
It’s hard work being a Fife BTL landlord and I still believe the burden of housing just under a fifth of the UK population isn’t appreciated or taken seriously by Government.
Notwithstanding the challenges, most Fife BTL landlords are in it for the long run. BTL mortgages can be secured for less than 1% and demand is on the rise (with rents rising at the highest rate for 10+ years). Of course, Brexit caused a few issues with some Fife landlords losing some Eastern European migrants. Yet once things settle down, we will have an influx of people coming from Hong Kong and Afghanistan, wanting to settle down, get jobs and ultimately require a home to live in, which will be a private rented house.
I know the Land and Buildings Transaction Tax holiday has cleared out the Fife landlords who were on the fence for staying in the private rented sector or selling up, but those Fife landlords that are left will be more professional and will run their BTL portfolio as a business, not a hobby.
My final piece of advice to anyone thinking of becoming a BTL landlord in Fife for the first time is that you have to have a strategy and plan ahead. Those who stumbled into the BTL market in the early 2000s made a lot of money without any strategy or tactics.
Moving forward you need the guidance and support of an agent who can tell you the best places for investment, be that for better yield or better capital growth.
They will also be able to tell you what tenants demand to ensure that you attract the right sort of tenants who won’t trash the place and leave you in arrears. If you would like some advice do not hesitate to drop me a line or pick up the phone.