Enduring love: a buy-to-let affair
As rates rise, has a nation of landlords become dangerously obsessed with property?
Sunday 13 May 2007
How long can the buy-to-let ball keep rolling?
Even last week's fourth quarter-point rise in interest rates in less than a year is unlikely to diminish the appeal of buying a flat or house to rent out.
The amount of cash lent to borrowers for this type of home loan mushroomed last year by nearly a third to reach almost £95bn. The numbers clambering on the buy-to-let ladder, or thinking of doing so, continue to increase, lured by the twin prospect of rental income and growth in the capital value of property.
The runaway success of the market presents a serious obstacle for those struggling to get on the property ladder for the first time, with the demand for buy-to-let investments driving prices ever higher.
Yet this demand - fuelled by social changes such as rising divorce rates and higher numbers of students and immigrants - shows no sign of falling off, thanks in large part to relaxed lending criteria among mortgage providers.
A survey by the market researcher Mintel, published last month, showed that while overall advertising on home loans fell by 10 per cent last year, the spend on buy-to-let mortgage ads rocketed by a third.
The survey also underlined the appeal of buy-to-let to ordinary members of the public rather than professional investors. Our view of bricks and mortar as an investment continues to be rosy, to put it mildly. Of those questioned by Mintel who already owned a second property, nearly three-quarters said they believed that buying bricks and mortar was a "good way of saving for retirement".
Patrick Macvean, 50, from Guildford, is typical of many smaller investors in the market. He has three buy-to-let properties across the UK, in Chatham in Kent, Godalming in Surrey and Market Drayton, Shropshire.
"In retirement, I might have them as an income-spinner," he says. "I also have some shares and a private pension but I am concentrating on property.
"Even if there's a big crash like in the 1990s, property will bounce back. I'm not stretched to the limit and [ensure] I have a buffer."
This optimism is echoed in reader correspondence to the Independent on Sunday Money desk. An alarmingly recurrent theme is the conviction that buying to let will provide a better income in old age than a company or personal pension.
James Cotton of mortgage broker London & Country points to a growing appetite for buy-to-let among younger savers and investors, who just a couple of years ago would never have considered it: "For many who are getting into this, it didn't start out as a deliberate strategy - rather it's almost accidental."
Patrick Connolly of the wealth manager JS&P Towry Law agrees. "Increasingly, two people [who each have a mortgage on their own home] decide to live together in one property, end up seeing both their properties increase in capital value and think, 'I'll keep these'. They also feel, with some degree of reason, that property is a better investment than shares [held in a pension fund]."
Over the past five and 10 years, the growth in residential property values - as measured by the Halifax Property Index - has put growth in the FTSE AllShare index in the shade.
In the past five years, the former has returned 88.4 per cent and the latter 57 per cent, based on figures from the independent financial adviser Bestinvest. Over 10 years, the comparison is 188 per cent against 110 per cent.
Look at the same figures over longer periods, however, and a different story emerges. The returns from shares over 15 and 20 years overshadow those from residential property - respectively, 331 per cent against 201 per cent and 586 per cent against 333 per cent.
"Buy-to-let has become more popular because of the perception that it will always do well," warns Mr Connolly. "The great danger is that individuals become overexposed to one asset class [in their long-term savings plans] - which, of course, has a higher risk."
In a rising market, such concerns can all too easily be set aside. Nevertheless, buy-to-let has much to offer investors who can afford to get into it.
Although the annual "yield" - a measure of the rent as a percentage of the property price - has dropped recently in a buoyant housing market, the growth in capital value of houses and flats more than compensates.
Most buy-to-let mortgages are taken out on an interest-only basis, and for tax purposes, the interest paid on the loan can be deducted from income derived from the property. Maintenance expenses are also tax deductible.
Melanie Bien of mortgage broker Savills Private Finance believes that now is as good a time as any to get into buy-to-let. "Although margins are tightening [for those with variable-rate home loans] as rent rises fail to keep pace with the increase in mortgage payments, [many] landlords are in it for the long run."
But, she adds, if you want to join them, research the market carefully and don't "overstretch yourself".
Boom Or Bust? Giddy heights in a market pushing £100bn
* There are 850,000 buy-to-let mortgages currently held in the UK; in 1999, the number was 73,000.
* The market was worth £94.8bn in 2006, up by 29 per cent on 2005.
* Volumes of buy-to-let mortgages ballooned last year: 2006 saw a near-50 per cent rise in the number of new loans to 330,300.
* Britain now has some 2.9 million privately rented properties. Industry estimates suggest that buy-to-let represents around 11 per cent of housing stock, up from 5 per cent in 2000.
* The market is very young compared with mainstream home loans, taking off only in the mid-1990s.
Compare with the Independent: See how much you could save by switching credit cards. Compare now
Threat of 'catastrophic cascade of collisions' involving 300,000 pieces of rubbish must be averted, warn scientists
Ukraine crisis is Russian roulette for investors
Make money as a mystery shopper
Investment Insider: Poundland may not be cheap when it floats
How to start your own internet business
The whole truth about legal fees: Conveyancing can knock a big hole in home-buyers' finances. To get the best deal you must cross-examine solicitors about their charges, says Sue Fieldman
- 1 Oxford is the least affordable city in the UK, where houses cost 11 times local salaries
- 2 Australian man Rod Sommerville reacts to bite from deadly snake by reaching for cold beer
- 3 North Korea elections: Kim Jong-un wins 100% of the vote
- 4 David Cameron resorts to paying for Facebook fans because not enough people like him
- 5 Steve Irwin’s final words: Cameraman present at death opens up about deadly stingray attack for the first time
Britain's top vet sparks controversy with call for ban on slashing animals' throats in 'ritual' slaughters for halal and kosher meat products
Poor 'live like animals' says Boris's privately educated sister after going on 'poverty safari'
Exclusive: Impact of immigrants on British workers ‘negligible’
Vince Cable: Teachers 'know absolutely nothing' about the world of work
Ukraine crisis: Russia pledges to 'retaliate against sanctions' as Ukrainian president says Crimea vote will not be recognised
The quiet diplomat: Catherine Ashton - recognised and admired in all the world’s troubled countries, yet ridiculed at home
iJobs Money & Business
£32000 - £36000 per annum + generous benefits: Pro-Recruitment Group: * TAX * ...
£55000 - £70000 per annum + benefits: Pro-Recruitment Group: In-House Corporat...
£80000 - £100000 per annum + benefits: Pro-Recruitment Group: In-House Opportu...
£30000 - £35000 per annum + generous benefits: Pro-Recruitment Group: Mixed Ta...
Day In a Page
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square
A charming four-bedroom house overlooking Burleigh Square Park, close to Thorpe Bay
A three-bedroom farmhouse with a large inglenook fireplace and exposed beams
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station
A Grade II-listed home with six bedrooms, secluded landscaped gardens and views across Hadley Green
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town