Alliance & Leicester has decided to diversify its mortgage business by offering buy-to-let financing products next year. The bank is known for its cautious strategy, evidenced by its decision not to get involved in the buy-to-let market when the housing market was rising sharply. While the bank is entering the market at a time when it expects the housing market to cool this year - though not to experience any sharp falls - it is hardly abandoning its cautious policy since it is targeting professional landlords, who are less risky than amateur buy-to-let investors.
The UK buy-to-let market is one dominated by specialists, including Mortgage Express and Birmingham Midshires. Alliance & Leicester's entrance is therefore significant as only a small number of mainstream lenders are currently involved, including Northern Rock, NatWest, Woolwich and Bank of Scotland.
Alliance & Leicester's strategy will not be to lend to single property landlords, rather, it will concentrate on high net worth professional landlords who can make use of new rules that come into force on April 6, 2006, allowing pension investors to enjoy 40% tax relief when they invest in property through a self-invested personal pension (SIPP).
Industry opinion is mixed on how significant SIPPs will be to the buy-to-let market. Estimates vary on the value of buy-to-let properties going into a SIPP. On the one hand, UCB Home Loans believes that between GBP3 billion and GBP5 billion next year will be invested in buy-to-let properties, of which a third will be funded through mortgages. This could result in a 15% rise in the number of buy-to-let purchases. Self-employed consumers could especially benefit from the opportunity to invest via a SIPP, as they need to undertake their own pension arrangements in the absence of a company scheme.
However, a number of industry figures have suggested that the hype around SIPPs boosting the buy-to-let market is unfounded and the rule changes will have little effect. There are high administrative costs associated with setting up and then maintaining a SIPP. Advisors have voiced their previous frustration in the lack of buy-to-let portfolio holders who have set up their own limited company. There are significant tax advantages to be gained from doing this, but the hassle has often put investors off, and some think the same will apply to the setting up of a SIPP.
It is questionable whether Alliance & Leicester will be able to take advantage of current professional buy-to-let investors. While tax savings are available for new buy-to-let investments, transferring an existing buy-to-let investment into a SIPP will result in capital gains tax on any profit gained, and the pension fund will be liable for stamp duty on the purchase.
Another reason for which current buy-to-let investors may be put off is because when a property is transferred into a SIPP, it is no longer owned by the individual, but by the trustees of the pension fund. It is likely that when the trustees wish to carry out maintenance on a property they will use contractors. This takes away the hands-on nature of a buy-to-let property, which has been one of its major attractions. Taken in this context, it would make sense for Alliance & Leicester to proceed with caution.