Buy-to-let is 30, and that is a milestone worth celebrating.
As one of the lenders on the original buy-to-let panel in September 1996, Paragon has seen the market develop from a specialist lending concept into an established part of UK housing finance. To mark the anniversary, we have launched a report that celebrates the achievements of the sector, 30 Years of Buy-to-Let, which I’d encourage you to read.
Buy-to-let’s greatest achievement lies in what it enabled landlords to do – provide good quality homes at a reasonable price to those people who cannot or do not want to purchase a home.
Before buy-to-let, landlords seeking finance usually had to rely on commercial mortgages. These were often expensive, complex and poorly suited to individuals investing in residential property.
There was no widely available mortgage designed around the economics of letting a home, but buy-to-let changed that. It assessed the rent a property could generate, its suitability for tenants and the landlord’s ability to manage the borrowing. This gave landlords a legitimate and more accessible way to acquire, improve and maintain rented homes, while providing lenders with a disciplined framework for assessing risk.
I recently spent time with John Heron, one of the architects of buy-to-let and the first person to hold my role (amazingly, I’m only the third!), and he explained the problem buy-to-let was designed to address.
Britain was emerging from a severe recession in the mid-90s, with many people unable or unwilling to buy. Society was also changing, with student numbers exploding, inward migration growing and people starting families later in life. Letting agents were seeing growing demand from people who needed somewhere to live quickly, whether they were moving for work, studying, forming a new household or dealing with a change in personal circumstances.
The private rented sector should have been able to meet that need, but it was small, underinvested and poorly served by finance. The social housing sector had been shrunk by the right to buy scheme. The Association of Residential Letting Agents recognised that landlords could provide more homes if funding was available on appropriate terms and its work with lenders led to the product formally launched in 1996.
What followed was a remarkable period of investment by landlords. England had just under two million privately rented households in 1996, representing around one in ten households. Today, the sector accommodates close to five million households, or nearly a fifth of the total, and there are nearly two million outstanding buy-to-let mortgages, worth over £300 billion.
Landlords provided homes for a changing population. They responded to the growth in student numbers, single-person households, labour mobility and inward migration. They supported families who needed flexibility and people buying their first home later in life.
Buy-to-let is a funding mechanism used by some landlords, but it is often confused with the broader private rented sector. It did not create every rented home, determine every rent or shape every landlord’s behaviour – indeed only approximately 40% of rental homes are mortgaged. What it did was give landlords a recognised route to invest in properties and expand supply.
That is just one of the misconceptions that have grown around buy-to-let, which has evoked fascination with the media and wider population since its inception.
For example, another persistent myth is that buy-to-let is inherently risky but its long-term credit performance tells a different story. Apart from one year during the global financial crisis, buy-to-let arrears have generally remained below those in the owner-occupied mortgage market.
That performance reflects prudent underwriting, strong tenant demand and the resilience of landlords. Buy-to-let affordability is assessed against rental income and stressed interest rates, while experienced landlords often have wider earnings or portfolios capable of absorbing short-term pressures.
Standards have improved too. The proportion of privately rented homes failing decent homes standards has reduced from four in 10 post credit crunch to around a fifth today – still work to do but a significant improvement. Additionally, over the past decade, the proportion achieving an energy-efficiency rating between A and C has more than doubled. Landlord investment has helped improve older properties and bring newer homes into the sector.
Buy-to-let was never intended to replace home ownership or social housing and we need each tenure to work effectively. Its role was to enable responsible landlords to invest in the homes required by people who need or choose to rent.
Thirty years on, landlords should be proud of what they have built. The next chapter must give them the confidence to continue investing in good-quality homes and meeting the country’s changing housing needs.
Louisa Sedgwick is managing director of mortgages at Paragon Bank
