Jeff Salway: Buy-to-let investors cash in on crisis

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MANCHESTER City Football Club fans used to sing that they all lived “in a Robbie Fowler house”, such was their striker’s burgeoning property portfolio.

Fowler was more prolific in the property market than on the football field in the mid-Noughties. Buy-to-let was booming, and investing in residential property was seen as a one-way bet.

The flipside, of course, was that it helped drive house prices to unrealistic levels. Buy-to-let lenders were hit hard when the crunch arrived, but the market is bouncing back.

Investment landlords are piling back in to capitalise on a rise in rental demand (and prices) that has been created by the contraction of the mortgage market. In other words, buy-to-let landlords – seen by many as helping fuel the credit crunch through their speculative and short-term behaviour – are now cashing in on the crisis.

It was reported last week that state-backed Lloyds Banking Group is to boost its buy-to-let advances to 21 per cent of its lending over the next 12 months, up from 17 per cent last year.

Other lenders are launching new buy-to-let products, and with demand for rental property outstripping supply – not least in Edinburgh – the stage is set for buy-to-let to emerge from the slowdown well before any other area of the housing market.

The paucity of decent savings deals – thanks largely to the Bank of England’s Funding for Lending Scheme giving lenders access to cheaper finance – means more affluent empty-nesters are turning to property in search of a regular income.

That’s good news for lenders, who would much rather lend to landlords than first-time buyers. For the aforementioned first-time buyers needing house prices to fall and for lenders to loosen their purse strings, however, it’s anything but.

Fixed rate costs fall

THE aforementioned Funding for Lending Scheme (FLS), launched by the Bank of England and the Treasury back in August, is credited as the main reason for the recent falls in fixed rate mortgage costs.

But the main beneficiaries have been equity-rich borrowers, with just a handful of lenders passing on the savings to first-time buyers. And new research shows that standard variable rate (SVR) mortgage costs have actually gone up since the FLS started, with existing borrowers missing out while new customers get the best deals.

One explanation, according to Capital Economics, is that lenders are once again exploiting customer inertia by relying on them to shift to their SVR once their fixed rate expires, rather than switch to a rival lender.

With a growing number of people trapped on their SVRs – including those with little equity or on interest-only deals – it’s an easy way for lenders to boost their margins at the expense of borrowers.

Meanwhile, the cheap cash available from the FLS means there’s less pressure on lenders to pull in savings deposits to fund their mortgage lending.

The rate on the best cash Isa available has fallen below 3 per cent for the first time since 1999. With other cash accounts also becoming less attractive, it seems savers are again paying the price while borrowers benefit.

So the FLS has enjoyed some success, but its flaws are considerable and damaging. While some borrowers have cashed in, those who most need the help have lost out.

Trust in pensions

BY REMOVING means-testing, the planned universal pension – set out last Monday – will give people more confidence that their savings will boost their retirement income. Later in the week it was revealed that the Office of Fair Trading (OFT) is to investigate the workplace pensions market. The two developments have the potential to deliver a timely shot in the arm for pension savers.

The OFT’s probe will focus largely on charges. With millions of people being shifted into workplace pensions, under the automatic enrolment initiative that kicked off in October, it’s of paramount importance that people can trust the product they’re saving into.

Pension costs have fallen in recent years, yet millions of people remain in older vehicles with high charges. For automatic enrolment to work – and it has the potential to be transformative – there needs to be far greater confidence in the pensions system. The OFT has to deliver.