Is Buy-to-Let Still a Good Investment?

SPEAKER_1 (0:02)

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Merryn Somerset Webb (0:18)

Welcome to Merryn Talks Your Money, the personal finance edition of Merryn Talks Money. In these bonus podcasts, we talk about the best strategies for making the most of your money. I'm Merryn Somerset Webb, Editor-at-Large for UK Money.

Now, this month is important, well, important for those of you invested in property anyway. It marks the 30th anniversary of the creation of the buy-to-let mortgage, a new type of home loan that triggered an explosion of rental activity in the UK when it launched.

But thanks to regulation and tax changes, I mean a lot of regulation and tax changes, being a landlord isn't quite as appealing as it once was. Well, that's my view anyway, other people may have different views. So this week, we're going to talk about how buy-to-let mortgages reshaped the face of property investment in the UK, and whether it has a future of any kind. Joining me today is the head of research at Hampstead International, Aneisha Beveridge. Hamptons has just put out a report on 30 years of buy-to-let. Aneisha, welcome to Merryn Talks Money.

Aneisha Beveridge (1:22)

Thanks for having me, Merryn.

Merryn Somerset Webb (1:24)

Right. It's been quite a ride buy-to-let, hasn't it? Can we have a little potted history? What is it that happened back in September 1996?

Aneisha Beveridge (1:32)

Well, I think it was 1996 when the first buy-to-let mortgage launch that really kickstarted the growth in the rental sector, and has really built the foundations of what we see in that market today.

Before that time, landlords or anyone that wanted to buy rental properties had to either buy that property outright with cash, or they had to rely on commercial loans, which tended to be pretty expensive in terms of interest rates, were only available on 10-year maximum terms. So it wasn't the most costly way of approaching an investment. But the use of a buy-to-let mortgage, using leverage, and importantly, banks started using rental income as a way of assessing affordability. And that really opened the doors to a bigger kind of group of investors.

Merryn Somerset Webb (2:22)

Yeah, and you could also get interest-only mortgages, couldn't you, in the buy-to-let business even then? Yeah. So you could put down a small deposit, huge leverage, and then rely on paying an interest-only mortgage off from the yield, and then assuming that inflation would mean that the remaining mortgage was worthless or negligible 30 years after that.

Aneisha Beveridge (2:43)

Yeah, and of course, I think it was interesting actually, back then when we look at some of the numbers, the majority of the buy-to-let mortgages that were taken out in the late 90s were actually repayment mortgages, not always interest-only. But of course, it was an era of very rapid house price growth, and we were seeing 20, 30 percent year-on-year growth in times in the late 90s, and all of a sudden house prices doubled within a six-year window, and it just built in the ability for people to use that equity and build portfolios from then on.

Merryn Somerset Webb (3:18)

So the way you say that suggests that over time, the majority of the return to investors in ByteLet has been from capital gains. But looking at the report, that's not what you say at all. You say something completely different, that the majority of the long-term return has been from rental income.

Aneisha Beveridge (3:35)

Yeah. So when we look over the full 30-year period, around two-thirds of an investor's typical total return has come from rental income. We split that period in half. And you look at the first 15 years leading up to the financial crash. And generally, we saw very strong capital growth.

Whereas over the last 15 years, we've generally seen rents outperform house price growth. So those kind of balances, the scales have very much switched during that 30-year period.

Merryn Somerset Webb (4:05)

Yeah, because initially, you were saying about the very fast house price growth in the late 1990s and early 2000s. At that point, for a lot of people, it didn't really matter if you had positive cash flow. You only had to break even. You only had to break even and nothing else really mattered because the capital gains made all the difference.

Aneisha Beveridge (4:23)

Yeah, absolutely. And I think that's the way that people looked at it. They were betting on house prices continually rising. They weren't so worried about the rental income. And it's why so many of them were actually on repayment rather than interest-only loans as well. That was capital growth because of what they had seen in the value of their own properties. That was where they were hedging their bets. Yeah.