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A brief history of buy-to-let

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This year marks the 25th anniversary of buy-to-let and we've been reflecting on the history of the private rented sector and how social, economic and political changes paved the way for the introduction of the buy-to-let mortgage.

Our former Mortgages Managing Director, John Heron, was at the forefront when this specialist mortgage product was first conceived. Here, he shares his experience of how it all began.

The private rented sector (PRS) we see today has been decades in the making, shaped by a range of social, economic and political changes, few as significant as the introduction of buy-to-let mortgages.

The boom of the 1980s saw large mortgages become widely available and many took advantage to climb onto or up the property ladder. The turn of the decade ushered in economic downturn, however, and the early 90s gave many their first unwelcome experience of a recession.

Arrears and repossessions were widespread as interest rates climbed rapidly to place pressure on all but the most prudent of households. Plummeting property prices and purchases resulted in negative equity and an end to the home-ownership aspirations that were not just encouraged but facilitated by the policy of the decade before.

The Government's Right-to-Buy scheme, introduced in The Housing Act 1980, saw millions of homes transferred from the social rented sector to owner occupation. This made it more difficult for the social rented sector, already hampered by policy changes and funding constraints, to meet the increase in demand for rented property driven by the recession.

Legislative changes introduced to increase PRS investment as part of The Housing Act 1988 were yet to make any real impact and with little supply to enable landlords to meet unprecedented rental demand, members of the Association of Residential Letting Agents (ARLA) looked for ways to encourage both new and existing landlords to inject funds into the sector.

At this time, with no financial products tailored to residential landlords, the only legitimate way of financing a property portfolio was through commercial mortgages. With high interest rates and low loan-to-values, as well as terms rarely exceeding 10 years, these didn't paint a picture of an attractive investment opportunity.

It was also well known in the market that some investors used standard residential mortgages and failed to declare that tenants were in the property, of course the terms of the mortgage would have been breached.

Working with Andrew Reeves and his colleagues at ARLA, as well as key specialist intermediaries, we designed a product that catered to the needs of landlords. Borrowers could get finance at up to 75% of the value of the property and would be assessed based on the income the property generated. In addition, landlords would be able to make the most efficient use of capital available and maximise their return due to the option to take out interest only mortgages.

This concept was opened up to other mortgage lenders after we recognised that the demand would likely be too much for any single company to meet if the product proved as popular as we expected it to.

On 24 September 1996 buy-to-Let mortgages were officially launched before being presented to the full ARLA membership at the association's conference in 1997.

The rest, as they say, is history.

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Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551