Buy-to-let

Buy-to-let is a British phrase referring to the purchase of a property specifically to let out, that is to rent it out. A buy to let mortgage is a mortgage specifically designed for this purpose.

Prior to the 1980s, the number of private individuals who became landlords was very small. Buying property to rent was seen as the preserve of professional landlords and persons who were sufficiently wealthy to pay cash or having sizable deposits enabling them to obtain commercial style mortgages. The modern style 'Buy-to-Let' mortgage, wasn’t available and the possibility of purchasing property as a means of funding a retirement income did not occur to most people. The infrastructure of loans, advice and information was not available.

The critical change came with the Housing Act of 1988 when the Assured shorthold tenancy came into being. This gave potential landlords and lenders the confidence that tenants would only reside in the property for a fixed period.

Since the mid- to late 1990s, Buy-to-Let has grown strongly. According to the Council of Mortgage Lenders, lenders advanced more than 1.7 million Buy-to-Let loans between 1999 and 2015. Over the past 12 years the private rented doubled in size. Buy-to-let mortgage balances outstanding recently grew to more than £200 billion – equivalent to the gross domestic product of Hong Kong.

As for all property rental, the benefits for a buy-to-let landlord can include a stable income from rental receipts, as well as an accumulation of wealth if house prices go up over time. Rising house prices in the UK have made buy-to-let a popular way to invest. The main risk involves leveraged speculation where the landlord takes a loan to buy the property, with the expectation that the house can be sold later for a higher price, or that rental income will meet or exceed the cost of the loan. In the best outcome for the landlord, she or he will have benefited from the use of the lending banks money indicating that she or he has allocated the capital more efficiently than professional investors could have done. If the landlord cannot meet the conditions of their mortgage repayments then the bank will seek to take possession of the property and sell it to gain the loaned money. If prices have fallen, leveraging could leave the landlord in negative equity.

A further risk is a substantial change in Government policy, as occurred in 2015 (see section below).

The government has taken steps to protect tenants over recent years, including compulsory third party deposit protection schemes and compulsory licensing of homes in multiple occupation (HMOs).

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Wikipedia