Banks and Building Societies seem to favour landlords
This month, a reader in Yorkshire submitted the following question to our Personal Effects column:
"I wish to avoid my investments being used to support the buy-to-let racket. Is there a building society that only loans for owner occupation rather than funding landlords' investments? I have helped one daughter avoid renting and will do the same for her sister, but would like to ensure I am not assisting buy-to-let in general."
Building societies date back to the "Midlands Enlightenment" when, in 1775, some citizens of Birmingham, then a fast-growing metalworking town, met at the Golden Cross Inn and agreed to pool their money to build houses for members.
The explosion in housebuilding in the 1920s and 1930s was largely financed by the building societies (Abbey in particular) and until the 1990s they were at the heart of the extraordinary rise in home ownership.
But are they now, as our reader from Yorkshire worries, turning their back on buyers in favour of landlords?
Rather than put the question to readers, I decided to ask the Building Societies Association. It told me that virtually all its members offer buy-to-let mortgages. "Building societies were originally established to house local communities, and the sector still has a keen interest in supporting communities which offer a choice of different forms of housing – for some people, renting is a choice rather than a necessity," said a spokeswoman.
Funny thing, that word "choice". When a spokesperson in favour of buy-to-let says it's about "choice", I ask them if they rent or own their home. I've never yet met one who doesn't own. "Choice", it seems, is for other people, not them. The reality is that only a few people choose to rent over the long term. The rest are more accurately described as "trapped".
Building societies are mutual organisations, controlled by their members. So it surprises me that there have been no resolutions at society annual meetings asking for a society to stop favouring landlords. The BSA told me: "We are not aware of any critical resolutions on this topic."
It's not difficult to understand why building societies are so keen to offer buy-to-let: loans to landlords usually earn the society a higher fee than loans to first-time buyers and are regarded as lower risk.
The BSA says one in three of its members' loans last year was to first-time buyers, and that one type of lending (buy-to-let) is not at the expense of the other (first-time buyer). But can we be sure of that? Landlords typically buy the sort of property – be it one- and two-bed flats in London or terraced houses in other towns and cities – that used to be the first rung in the ladder for would-be owner-occupiers.
Because Britain builds so catastrophically few houses, this is arguably a zero-sum game. When a loan is granted to a landlord, it effectively means yet another property is removed from owner occupation. It doesn't help that buy-to-let remains unregulated, with loans calculated on a cheap interest-only basis (with tax benefits thrown in), while today's first-time buyers have the full force of post-financial crisis regulation dumped on them.
Neither does it help that our pension system remains so incapable of providing security for savers. It's entirely understandable, financially speaking, that someone should want to invest in a property for their pension rather than cash Isas – now paying a pathetic 1.7% average interest. But the rational self-interest of investors is sentencing young families to a life of precarious renting.
Perhaps buy-to-let should be restricted to new-build properties only. Money pouring into new build could help to stem price rises while boosting the construction industry. Is this the way to turn buy-to-let investors into heroes rather than villains?