Uncovering the hidden benefits of a shrinking buy-to-let market

Last updated: 16 February 2018

Bad news for lenders means good news for investors...

I like to look for the hidden upsides of the recent attacks on buy-to-let, and the resulting fall in new landlords entering the sector and increase in existing landlords reducing their portfolios.

The benefit I'm still waiting for is an increase in stock coming onto the market – especially tired rental stock where there's the potential to add value. So far this hasn't come to pass, and we might need to wait until after landlords have done their tax returns next January and re-done their sums.

But one benefit we're seeing right now is in mortgages – not just with the low base rate, but also lenders becoming more flexible with their terms and generous with their rates.

Lenders gonna lend

I've said it before: lenders need to lend. Eventually if demand remains low then some lenders will have to leave the market, but at the moment they're frantically competing with each other to maintain their lending volume by taking a bigger slice of a shrinking market.

You can see the effects of this competition take different forms.

The most obvious is low interest rates, which are the result of competition as well as the low base rate. The Mortgage Works recently released a 5-year fix at 1.99% – which only applies for cases where the loan-to-value is below 50%, but is still crazy low. Fee-free products are also increasing, as lenders try to find ways to win business when they can't cut rates any further.

Less obvious but still important is in the relaxing of criteria. Accord have reduced their stress test, as have LandBay. Paragon have dropped their floating charge requirement for limited company applications, and it's likely that other lenders will follow.

And finally, lenders are reaching out to customers they previously weren't interested in serving. Mansfield's family buy-to-let product is one example, and several lenders are now lending to first-time landlords who don't own their own homes – which previously was a situation that made it almost impossible to secure a mortgage. I'm hoping that this means more mortgages will become available for other niche sectors like holiday lets and serviced accommodation, which are extremely limited at the moment.

What about limited companies?

Most of these improvements (from the borrower's point of view) apply to the personal buy-to-let market, not limited companies – because competition is exaggerated in this market as a result of so many investors moving to limited company structures.

The same is likely to happen in the company buy-to-let sector, because the mechanics of the market are exactly the same – they're just being obscured at the moment by so much business moving across, and lenders are scrambling to keep up.

In the meantime though, it reinforces the fact that limited company ownership should never be the default choice and the decision is always case-by-case: you need to weigh up the tax advantages against lower mortgage rates, and more generous criteria that might allow you to borrow more or to finance a property you otherwise couldn't.

Now's the time

This combination of factors – low base rate, high lender competition and a shrinking investor pool – won't be around forever. So don't be seduced into making marginal investments that won't work when conditions return to normal, but do review the lending across your portfolio and speak to your mortgage broker about how you can take advantage while lenders' pain is your gain.