2010 has provided a solid base for the buy-to-let market on which to build over the next 12 months, according to Nigel Terrington, chief executive of Paragon Group.

The number of BTL lenders and products has increased and gross advances are expected to be up at least 10% on 2009 numbers and Paragon expect that positive sentiment to continue into the New Year. They say that gross lending will rise steadily during 2011 and in the absence of any major economic downturn, should finish around 10% to 15% higher than 2010 levels. However, they believe it will be some time before levels of lending are consistent with historically ‘normal’ market conditions.

“A key issue for landlords next year will be access to buy-to-let finance and I expect an improvement in this area”, says Terrington.

“It is expected that we will see a number of new lenders entering the buy-to-let market in 2011; however, the recent trend has been to focus on smaller-scale landlords and there is a risk that we could end up with too many lenders concentrating on this end of the market at the expense of professional landlords. There are more and more lenders squeezing into the same space competing on price, but with little product innovation. The buy-to-let market is crying out for product innovation and diversity and we will not get that if too many lenders are chasing after the same customer.

“It is vital that new lenders entering the market do so with a robust valuation process that recognises that buy-to-let is a very different proposition than the owner-occupier market. That sounds like a simple task but too many lenders got it wrong before the credit crunch and were burnt as a result – valuing a buy-to-let property as if it were an owner-occupier property doesn’t work, it requires specific expertise and experience.

“Lenders must also be cautious on affordability. Certain lenders are testing affordability on a short term product rate, rather than a higher reference rate, which could be dangerous when interest rates start to rise, as they are expected to do in 2011. Risk and affordability is not the same thing and the industry must be conscious of this as it underwrites new business.”