A Brief History Of Buy-To-Let Mortgages

Posted by Nick Niesen on October 29th, 2010

Evolution of the Buy-to-Let Market

Investing in property is a relatively new phenomenon in the UK. Prior to 1990 rental properties were dominated by the Government. The private rented sector only began to emerge once the Government changed its housing policy in the 1980s and mortgage lenders began to introduce specialist buy-to-let mortgages.

During the post-war period of 1945 to 1980, the UK Government did not favor the private rented sector. A number of housing policies were in existence that stifled the possibility of ordinary individuals profiting from owning and renting out residential property to private tenants.

To begin with, the UK Government controlled a large council housing scheme that provided rental accommodation for non-homeowners. The accommodation was supplied by the Government at a local level and rent was collected accordingly. In addition to this there were strict rent controls in place as well as tax concessions for owner-occupiers.

During the post-war period the Government also controlled a massive scheme to build homes for UK residents. In contrast, today there are virtually no private dwellings being built by the Government and most residential dwellings are built by private enterprise.

The modern buy-to-let industry can trace its roots back to the 1980s when the Thatcher Government began to encourage council tenants to buy the properties they were renting. A "right-to-buy" scheme was introduced which allowed council tenants to buy their properties at significantly discounted prices. During this period the private rented sector also began to emerge because fewer people were renting properties from the Government. Instead, tenants were more open to renting from private landlords.

Buy-to-Let Mortgages Emerge in the UK

Property investment really began to take off in the 1990s thanks to a small group of lenders who began to offer specialist buy-to-let mortgages to individuals who wanted to own residential investment properties. There were six lenders in total and they collectively founded the Association of Rental Letting Agents (ARLA).

In addition to the availability of buy-to-let mortgages, the private rented market experienced a period of growth due to several social and economic factors. These factors included increases in the number of small households, net immigration, the growing number of university students, and an increase in the average age of first-time-buyers. The combination of these factors led to an increase in the number of properties available for landlords to buy and the number of tenants who wished to rent property from them.

Ever since 1996, when the ARLA panel of lenders introduced buy-to-let mortgages to the UK market, property prices have experienced strong growth. The property market has consistently outperformed the equities market and for this reason more and more individuals have added at least one buy-to-let property to their portfolio of investments.

Many investors who bought property as early as 1996 have experienced high returns on the capital value of their properties. This has allowed them to refinance their buy-to-let mortgages in order to release equity and buy even more properties with the proceeds. Other investors use the funds collected from releasing equity to invest in other businesses or to fund their lifestyles.

Additionally, people who did not invest in buy-to-let properties in the 1990s have witnessed the enviable level of returns the early investors have experienced. This has resulted in a new wave of UK residents purchasing buy-to-let property with the hope of achieving similar medium to long-term gains.

These factors have combined to ensure that the property market in the UK remains strong and that prices continue to rise beyond the rate of inflation each year. The market for buy-to-let mortgages has also flourished in line with the property market as lenders line up to take their share of the spoils.

The Future of Buy-to-Let Mortgages

Buy-to-let mortgages have evolved considerably since 1996 as the UK property investment market has increased in popularity and sophistication. There are now dozens of lenders offering hundreds of buy-to-let mortgages for almost every type of residential property. From humble beginnings, the buy-to-let market has grown considerably.

The future looks bright for the industry despite the UK property market becoming saturated with investors and lenders. Buy-to-let mortgages should continue to evolve for the UK property market, ensuring that residential property remains a popular investment vehicle. Additionally, as foreign countries open their property markets to UK investors, UK lenders will no doubt create specialist buy-to-let mortgages to cater for investors wishing to take a chance on offshore property investment opportunities.

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Nick Niesen

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Nick Niesen
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