The buy-to-let mortgage market has grown quickly over the past few years. But the majority of that growth has come from landlords remortgaging their existing loans, rather than new buyers entering the market.
As a result, we think that concerns about the rise in buy-to-let lending are somewhat overdone.
In recent years, buy-to-let mortgage lending has grown rapidly compared to the rest of the market.
This rise has raised concerns from policymakers, in particular the Financial Policy Committee who believe that buy-to-let could pose a threat to financial stability. But what exactly has been driving this increase, and how does that affect our view of the sector?
At first glance, buy-to-let lending does appear to be rising quickly. The latest data from the CML show that the number of buy-to-let mortgage advances rose by 37.9% y/y in August 2015 – much faster than the 4.1% growth seen across homeowner mortgages.
What’s more, this trend is not new – annual growth in the value of buy-to-let mortgage advances has averaged around 30% for the last five years. Consequently, from a share of 5.5% in the depths of the crisis, buy-to-let accounted for 16.9% of gross lending in Q2 2015 – higher than at any point prior to the crisis.
That said, since 2010, nearly 60% of the growth in buy-to-let mortgage lending by value has been remortgaging, while around 40% has been for house purchase. By comparison, in that same period, only 32% of the rise in homeowner lending was remortgaging.
On the whole, this suggests that the rise in buy-to-let mortgages has been driven less by an influx of new and inexperienced landlords, and more by existing landlords renewing their loans.
Indeed, when looking at only mortgages for house purchase, buy-to-let accounted for a much more modest 11.9% of gross advances in Q2 2015 – five percentage points below the 16.9% peak seen in Q1 2008.
What’s more, there are reasons to believe that the current strength of buy-to-let remortgaging will be temporary.
For a start, mortgage interest rates are at an all-time low. And the difference between average interest rates on new and existing unregulated mortgages, nearly all of which are buy-to-let, has dropped to its lowest level since 2008.
These factors suggest that the incentives for investors to switch mortgage have been rising, and may explain why remortgaging has performed so strongly.
But with the Bank Rate set to rise next year, mortgage rates should soon rise as well. Over time, this should reduce investor incentives to remortgage, putting a gentle brake on activity.
All in all, the fact that remortgaging has driven the rise in buy-to-let lending leads us to think that concerns about the sector’s growth are somewhat overdone.
That’s because a pick-up in lending to replace existing mortgages is less likely to have happened because of falling credit standards, compared to if the loans had been used to make a new purchase. That said, banks’ exposure to buy-to-let loans has been rising, and at £200bn, is not insignificant.
Consequently, while the FPC concluded in September that there was no immediate case for action in the market, it does seem likely that they will receive new powers over the sector in the future.