25 years of buy to let mortgages

The PRS has doubled in size, since the introduction of the first buy to let mortgage, 25 years ago this month.

We take a look at the establishment of the product, as well as the positive effects it has had on the UK.

History of buy to let

Back in 1996, the Association of Residential Landlords (ARLA) wanted to develop a mortgage product specific to landlords.

They worked with a small group of lenders including Paragon and NatWest to come up with a solution, the buy to let mortgage.

Up until this point, the private rental sector had been in a steady long-term decline since the war, and new investment was needed.

Investment opportunities were difficult to attain and came with the caveat of steep rates.

Former Arla Propertymark president Robert Jordan reminisced:

“We at Arla realised that the housing market was at a low ebb; houses weren’t selling, which meant a lot of people were letting their homes to move to a new property.

“When the housing market picked up those properties sold and there was a need for more rented properties to fill the gap for tenants, but we couldn’t see where we would find more homes to let.

“It became clear that the mortgage options weren’t suitable, so together we designed a product, buy-to-let, that would enable more investors to purchase an investment property and let it under the new Housing Act 1988 regulations. Paragon and NatWest were the first two mortgage lenders we approached.”

Financial landscape

The 1990’s recession highlighted a lack of options for those who fell into a grey area of financial stability.

They were unable to afford to buy a home for themselves but earned too much to qualify for housing benefits.

The number of properties within the PRS had fallen, from over 70% of homes after World War I, to less than 10% by the late 1980s.

This gap was fuelled by the growth of social housing, policies to encourage home-ownership, and a legal landscape that didn’t protect landlords.

Prior to the launch of the buy to let mortgage, another stumbling block for portfolio landlords was that they had to apply for mortgages through commercial terms.

These mortgages were often low loan to value, unlike todays up to 85% LTV offering. They also had steep rates, which weren’t attractive to all.

The PRS has almost doubled in size since the introduction of buy to let products, from 2.4 million households in 1996 to 4.4 million today, 19% of total UK households.

Paragon managing director for mortgages Richard Rowntree commented:

“Since being launched as a mortgage product specifically designed for landlords 25 years ago, buy-to-let finance has helped to transform the PRS.

“It is now a vital component of the UK’s housing provision, with renting no longer a last resort.

“The PRS is a tenure of choice as well as need and this is supported by the diversity of those who actively choose rented homes, benefitting from the flexibility they provide.”

Housing the nation

While work that landlords do is sometimes painted in a negative light by the press, citing “greedy” landlords and “money-grabbing” intent, it needs to be remembered that in the last 25 years landlords have changed the game when it comes to private housing, and serve an important role in housing market.

The buy to let mortgage, now a mature financial product with two major economic shocks under its belt, still remains undiminished as landlords look to invest in their future, and that of the rest of the UK.

Richard Rowntree, managing director of mortgages at lender Paragon posed the questions:

“Without BTL growing and modernising the PRS, how would the significant expansion of the student population over the past 20 years have been facilitated? Where would the millions of people who have moved to this country to study or work have lived? What would those that simply can’t or don’t want to buy a house have done?

“And as we mark its quarter century, its contribution to the UK housing mix should be celebrated, applauded, and recognised.”

The buy to let mortgage has delivered a significant financial and social effect on the UK, and whilst it has been a tough 18 months of adaptation following Covid-19, landlords have continued to show reliance in the face of challenge and provide a necessary service to those in need of homes.