Buy-to-let investors are returning to the market in considerable numbers which is having a knock-on impact to potential first-time buyers.
Research by property investment firm Assetz reveals that buy-to-let investors with large cash deposits are outmuscling first time buyers.
A big reason for this is that risk-averse lenders demanding big deposits are being drawn back to the sector and away from the high loan-to-values required by most first time buyers.
Lenders must also hold more capital against mortgages with smaller deposits, under financial authority rules.
What is happening with buy-to-let?
Buy?to-let investors are looking to take advantage of current market conditions, with lower prices and strong rental growth which looks set to continue.
Paragon, which re-entered new buy-to-let lending in September last year, has reported today that tenant demand rose during the first three months of 2011.
The quarterly snapshot of the private rented sector and buy-to-let market from the group shows 49% of landlords recorded growing levels of tenant demand during the period, compared with just 5% who said it was falling.
Those buying with mortgages have deposits of 25-40% typically, and are an attractive prospect to lenders due to the lower loan-to-value loans required and their proven track record in repaying mortgages.
However, the typical first-time buyer profile means they are being squeezed from the market by stricter deposit requirements, lack of bank capital and because they present a less attractive prospect to lenders.
This is due to the higher loan-to value-loans required and their lack of track record in repaying a mortgage loan.
Stuart Law, chief executive of Assetz, said: ‘Lenders are making no secret of the fact that they would rather allocate the limited funds they do have to the lower risk option of buy-to-let loans, with deposits of 25-40%, than first-time buyers loans with 90% loan to values.
‘As a result, the buy-to-let sector is recovering at a remarkable rate, as investors are drawn back by the need for a long-term, low-risk investment for their cash.
‘The buy-to-let sector has not been as hard hit by the recession as people feared, due to the fact that interest rates have remained extremely low.
‘This has protected landlords by giving them cashflow, and future rate rises, which are likely to be small and gradual, will be covered largely by rental increases.’
And looking forward, landlords are expecting tenant demand to continue to strengthen. Over half of landlords expect demand to increase over the next 12 months.
Nigel Terrington, Paragon Group Chief Executive, said: ‘We are seeing evidence that strong tenant demand is feeding through to higher rents.
‘A lack of available mortgage finance is restricting the sector’s ability to expand and needs to be addressed to create a healthy and vibrant buy-to-let market in the UK.’
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