The BTL market: Reasons to be optimistic

craig mckinlay kensington mortgages

Craig McKinlay is new business director at Kensington Mortgages


Buy-to-let (BTL) tends to have a ‘bad rep’ in national media. Headlines can boarder on hysterical; ‘Government declares war on landlords’ or ‘Buy-to-let is a ticking time bomb about to explode’. There is no denying the market has taken a hit over the last few years, however the fundamentals of the market have and will remain strong. BTL is a great opportunity for brokers and their clients to have a long-term investment strategy in place.

Stocks versus property

It’s the age-old debate. In this instance, let us look back at a 15-year timeline. Of course, we have the 2008 financial crash, property crash, and other natural cyclical movements to consider.

If you had invested in 2005, the average property price back then was £150,000. Factoring in 2008’s property crash – that (unmortgaged) £150,000 investment has now been turned into £239,000 – based on the average property price in August. An increase of 59%.

In terms of the stock market if you had invested £150,000 in the FTSE All Share Index in 2005 – your portfolio would have grown by 40% over this timeframe to £210,000.[2] So 19% less growth. This does not include dividend income which averages around 3% – so we are only looking at capital growth here.

Looking at BTL is where it gets interesting. Say the buyer purchases a property worth £150,000 with a BTL mortgage, putting down only £60k of the investments’ total worth, with the remaining £90k in the form of a BTL mortgage at 60% loan-to-value (LTV).

Taking the exact same timeframe as the first two, the buyer will have gained £149,000 and asset growth of 148%. On top of this, the buyer will have money left over to reinvest – for example putting another £60k into a second property. With a total of £120,000 invested in two properties (and £30k savings left over) – the buyer walks away with £298,000. That’s the leverage of investment you can theoretically get in long-term Buy to Let.  To enable comparison, we have not included rental income growth, which taking into consideration other costs for first time buyers, runs at about 3%.

While this is, of course, a generalised example and a prediction of past performance is not an indication of future market performance – it is based on real figures and real house prices – and the fundamentals that drive the Buy to Let market are not going to change.

So what are these fundamentals?

Rates are getting lower

Over the years, buy-to-let rates have in fact been decreasing. Instead of focusing on this, the majority of media focus has been on reduced tax relief and increased regulation. So, while other costs have increased, the largest cost and biggest commitment, the mortgage, has in fact decreased.

Improve, adapt, overcome

According to BVA BDRC’s Landlords Panel report, 87% of landlords were still able to make a profit in Q2 2020. When we consider that the first lockdown was fully underway by this point, the furlough scheme was created and tenants struggled to pay rent and landlords reduced rents, the market was remarkably resilient under the conditions of the pandemic lockdown. Positive returns were still achievable, even with several other industries experiencing a hard-knock effect from COVID-19 globally.

The specialist market has also been evolving consistently to meet the changing needs and demands of buy-to-let – whether that’s introducing limited company or houses of multiple occupancy (HMO) lending, or a product for someone who is just starting out as a first-time landlord. The specialist lending market caters to all these needs with unique solutions and will continue to do so.

Ultimately, BTL is a strong asset class. Mortgage rates are low, demand from tenants is high and long-term growth potential is significant. The future of the market is certainly an optimistic one especially when we consider everything that has been thrown at the market over the last few years –the Brexit referendum, increased regulation and the pandemic – the market has bounced back each time.


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