Though it seems to have been with us forever, in fact buy-to-let was officially launched on 24 September 1996 by the Association of Residential Letting Agents, or ARLA, at London’s RAC Club.
However, the history of buy-to-let goes back to the early Sixties, when the landlord Peter Rachman became notorious for harassing and exploiting his tenants in west London. This led a series of legislation, such as the Rent Act, that offered increased protection to tenants, but made life increasingly difficult for landlords.
With availability of property in the private rented sector dropping to an all-time low, the 1988 Housing Act redressed the balance by introducing the Assured Shorthold Tenancy, which gave landlords new rights and security, and is still the standard contract used today.
However, one problem remained. “In those days, the difficulty for potential landlords was access to finance,” says ARLA’s Ian Potter.
“They had to resort to commercial loans, which had rates of four or five points above the base rate.
“When we came up with the concept of buy-to-let, we persuaded banks and financial institutions that buying property to let was not such a high risk. The key features we came up with were that mortgages should be not more than 75 per cent loan to value, and rental income had to be around 140 per cent of the mortgage payment. The formula is still much the same today.”
With the launch of buy-to-let, lenders began offering mortgages that cost the same, or slightly more, than normal residential mortgages.
Since then, buy-to-let has galvanised the rental market, says Nigel Terrington, chief executive of buy-to-let mortgage specialists the Paragon Group. “Buy-to-let finance was the catalyst for the revitalisation of the modern private rented sector,” he says. “The flow of fresh capital modernised a tired and decaying sector, driving up standards of accommodation and choice for tenants.”
The statistics agree. Since the birth of the sector, the value of outstanding buy-to-let mortgages has increased almost 30 times, from £5.4 billion in 1999 to £154.5 billion in 2011.
The market also opened up to a new type of landlord. The majority today are not commercial operations with large portfolios, but private individuals with fewer than five properties.
It hasn’t all been plain sailing for buy-to-let. In the aftermath of the credit crunch, mortgage lenders pulled out in droves, and reckless buyers who were caught up in what Ian Potter calls the “feeding frenzy” of the boom years lost their investments.
Now, however, things are looking up again. Lenders have returned – including Paragon – and according to new research released last week by the National Landlords Association, the number of mortgage schemes on offer rose by 25 per cent in the spring quarter of 2011. The average loan size also grew by £2,166 to reach £138, 525.
The Council of Mortgage Lenders, which has backed buy-to-let since the 1990s, says the value of new loans increased by 21 per cent during the spring period, with 32,000 loans collectively worth £3.5 billion taken out between April and June.
This rush has led to some lenders withdrawing the very cheapest deals available, but rates remain affordable, especially for buyers with sizeable deposits of 30 to 40 per cent, with a wide choice of deals on offer under four per cent.
Landlords also have a bigger choice of products - according to Moneyfacts, there are now 465 buy-to-let mortgages on the market, double the number on offer a year ago.
Meanwhile, investor database Assetz says confidence in the market is robust, due to high rental demand and rising rental values, with its new research showing that over three-quarters of landlords are considering buying new properties in the next year.
Stuart Law, chief executive of Assetz, says: “The buy-to-let market is booming with landlords returning in considerable numbers, encouraged by the excellent rental returns currently available, as well as the prospect of long-term capital growth if property prices continue to strengthen.
“UK residential property in the right locations is increasingly viewed as a safe haven, offering investors a long-term, low-risk investment for their cash.”