Figures out from the Council of Mortgage Lenders today show that buy to let mortgage lending – mortgages for landlords buying property to rent out – has reached a record high. Now £1 in every £8 of mortgage lending goes to buy to let.
The appeal is obvious. It feels like every week a news story goes out reporting rising rents. And, as research by Jones Lang LaSalle found, many subscribe to the “small island” theory – that Britain is so small that it will never have quite enough homes – and so property investment will always pay off.
With first time buyers fast becoming an endangered species, there’s been a lot of focus on helping more of them get on the property ladder.
But the growth of buy to let threatens to undermine these efforts. NewBuy, Funding for Lending, FirstBuy and now Help to Buy are all aimed at making it easier for first time buyers to borrow and get on the ladder, by under-writing or reducing some of the risk they pose to lenders. As a result of these schemes, some first time buyers can now get a mortgage with only a 10% or 5% deposit.
By contrast, landlords typically put down 20% or 25% deposits to get a buy to let mortgage, meaning they have a lot more cash to invest, can buy a home with less borrowing, and so have lower monthly mortgage costs than first time buyers do.
It’s little wonder then that the 9 million renters in England, most of whom want to buy a home of their own, find that they can’t compete with the buying power of landlords, even if they can raise a 10% or 5% deposit.
The risk issue is significant too. When I was buying my flat I was up against a foreign investor with a big lump sum to put down (yes, even in a less salubrious part of Hackney!). I know that my seller was keen for the swiftest and safest sale, and that my rival’s big deposit was a big attraction for them.
Somewhat counter-intuitively, the Help to Buy scheme actually makes mortgages more expensive for first time buyers, as lower deposits mean more borrowing and higher monthly costs. These put borrowers at greater risk of running into difficulty with their repayments, making the bank more likely to turn down their mortgage application, causing the sale to fall through. Sellers may therefore see landlords as being lower risk, as they are putting down a bigger deposit.
The implication for government is that their current suite of first time buyer policies will be unlikely to open up ownership to a wider group of people, because investors with more cash will have more buying power.
Even if we do finally get round to building the homes we need, a generation of first time buyers may still see the dream of homeownership that their parents achieved so easily slipping away, as investors beat them to it.
The government needs to really think through how its schemes can be made to help more renters compete in this market. Deposits are only one barrier: ongoing affordability is the real issue, which current initiatives have failed to address.
P.s. if you are interested in this issue, sign up for a debate that the Strategic Society Centre is convening on Help to Buy. It’s free and takes place on 5 June in London.