A recent survey by a Law of Property Act receiver estimates that there are 99,000 tenants that are two months overdue on rent. This will be unwelcome news for any holder of a buy-to-let mortgage portfolio, and although it does not automatically follow that tenant arrears result in a landlord not being able to pay their mortgage, the situation will not help their cashflow and is likely in the long run to increase buy-to-let mortgage arrears and repossessions.
Lending policies of some lenders in the boom period when there was a race for quantity, rather than quality, led to some ignoring income affordability on buy-to-let lending, preferring to rely solely on predicted rental cover. In addition, we saw some lenders treating all portfolio loans as self-funding, and not taking account of portfolio debts in affordability calculations.
When lenders relied on a 125% to 130% rental cover calculation, there was some protection against rental voids, but a number of lenders reduced that margin over time to a position where, in some cases, the rent only covered the initial discounted mortgage rate. Maybe this is partly why there is now a higher repossession rate on buy-to-let than on owner occupied mortgages.
Against this backdrop, we have seen an increasing trend of buy-to-let portfolios collapsing, resulting in us being asked to review the original lending decision, arrears management and sale of the property. Three years ago we were normally asked to comment on single buy-to-let transactions that had failed, but we are now often asked to review multiple transaction cases where a portfolio of buy-to-let loans has failed.
There are still thousands of buy-to-let loans outstanding that were underwritten in the boom years and they are only being maintained because of the low interest rate environment and the lack of re-financing options for landlords. No doubt lenders and portfolio holders will be keeping a watching brief on tenant and mortgage arrears statistics and adopting tactics to protect themselves.
Brian Pitt is CEO at financial services risk advice and due diligence company Rockstead. He can be contacted at Brian.pitt@rockstead.co.uk
