Before the buy-to-let scheme started in 1996 it was extremely difficult for private investors to raise finance on residential investment property, unless they were already high net-worth individuals, or were high-income earners, or both.
At that time any residential property loan, other than a standard mortgage loan to an owner-occupier, would be treated by the banks as a commercial loan.
This resulted in several serious negative consequences for prospective investors:
- No account was taken of the existing, or potential, rental income of the investment when calculating the loan amount. The only income taken into account was the borrowers existing income;
- Loan to Value Ratios (LTV’s) were restricted. Typically these could be 60% or even as little as 50% of the value of the property; and
- Interest on the loan was often charged at 2% or more above standard residential mortgage rates.
In addition, lenders were reluctant to lend on residential investments because existing landlord and tenant legislation (“The Rent Acts”), meant is was difficult, if not impossible, for a lender to get vacant possession if the loan went bad and the property had to be repossessed.
All in all, this made property investing a “minority interest” with generally only the “well-off”, or property companies, able to participate.