BTL mortgages entered a new era last year with the introduction of new lending guidelines brought in by the Prudential Regulation Authority in association with the Bank of England.
The regulation was introduced in two tranches.
The first set of regulation was, in essence, designed to reduce loan to values by increasing the coverage of the rent over the monthly mortgage payment. This typically reduces the loan to value to around 60 -65%, depending on the rental yield of the property. This is classified as the loan to interest covenant.
The second set of regulation was directed at portfolio landlords, defined as landlords with 4 or more properties. This category of landlord has to undergo even stricter underwriting, looking at their entire portfolio and also their tax position.
The legislation affects new landlord borrowing, but will likely also impact on those landlords who have mortgages reaching the end of their term or landlords looking to re-mortgage to better or fixed rates.
A quick summary to understand why
The buy to let mortgage was introduced in 1996 and made buy to let possible for the masses.
Interest only BTL have accounted for the vast majority of this type of mortgage, and this means that, over the term of the mortgage, only the interest was paid, not the capital.
So if you borrowed £150K at the start of the mortgage, then 20 years later, if you have not made any over-payments, you will still owe your lender £150K.
Particularly in the 2000’s, BTL lending soared and there were some products that went to 90% loan to value, meaning only a 10% deposit was needed.
This attracted many landlords to build up very highly geared portfolios very quickly, hoping that property prices would increase significantly to allow them to build up equity over time.
Nice idea but then the financial crash of 2008 happened and property prices, particularly in the North of England, decreased - sometimes by up to 40% - leaving some landlords in negative equity, a very dangerous position to be in.
Landlords who took out high LTV mortgages in the days of easy finance will now be approaching end of term.
Many of them will still be highly leveraged.
The PRA will have the biggest impact on sole-trader landlords in London in the south east, due to the poorer yields in this area of the country, but it will also affect those with poor yields and high LTVs.
Judging by posts appearing on the property forums, an increasing number of landlords are finding it hard to re-mortgage, particularly portfolio landlords. There is now only a handful of lenders who will operate in this space, and many landlords are finding that they are being turned down for re-mortgages as they and/or their portfolio do not meet the new stricter criteria!
According to the National Landlords Association’s (NLA) latest research, 63 percent of landlords aware of the changes believe it makes obtaining new buy-to-let mortgages more difficult. This increases to 70 percent for portfolio landlords, i.e. those with four or more buy-to-let mortgages.
Similarly, almost half (48 percent) of landlords aware of the changes believe it has slowed down the finance process and 46 percent believe the changes reduce the range of mortgage products available.
Finance and leverage is the lifeblood of a buy to let business.
Without being able to re-mortgage, landlords will find their options dramatically reduced, especially at a time when interest rates are predicted to rise another two times this year.
They will be left on rising standard variable rates, meaning that their monthly net cash flow will be reduced and they have nowhere to go.
Sell a property with sitting tenants
For a landlord in this perilous situation, there is only one way out and that is to sell the property – which you can do with or without sitting tenants living there.
Some lenders may consider extending the term for landlords in distress, but that is only a temporary solution.
If the loan term has expired, then the Terms and Conditions the landlord signed up to when they took out the mortgage will have to be adhered to, and the loan repaid, or you will need to remortgage if the current lender or a new lender is amenable.
This may come as a surprise, and they will need to take positive action to stop this becoming a significant problem.
Of course, the property can be put on the open market for sale, but then there is that age old conundrum of selling the property tenanted or un-tenanted.
The risk of serving notice on the tenant when you do not have a buyer committed to a sale is quite significant, as around 40% of sales fall out of bed anyway, not to mention that the average time for a sale to complete in the UK can be anything between 3 and 9 months depending on the situation, the area, etc.
If the tenant leaves, and the sale falls through, the landlord is left paying the mortgage with no rental income.
That is where LandlordBuyer comes in as we offer a quick purchase of tenanted properties. You can sell either one single property or your portfolio – we have no upper or lower limit to our buying power.
We offer complete certainty and peace of mind that the money will be in your bank account on a given day providing that the legal due diligence is satisfactory and sound structure.
We are a family-run business of professional property buyers with a genuine cash fund that can be used to purchase your property quickly and without hassle or stress.
You simply get in touch with us and book a valuation. We will then make a no-obligation offer to you within 48 hours of you contacting us. Should you wish to accept our offer, we will arrange with you a suitable completion date that suits you.
If you do not wish to accept our offer, you have lost nothing, and you may want to re-consider in the future.
There are no estate agents involved, no viewings, no need for your tenant to be served notice or disrupted prior to completion.
It really is that simple and easy to sell a tenanted property to LandlordBuyer.
We recommend that all landlords with mortgages coming to the end of their term seek professional mortgage advice to fully explore their options, but we have a solution if you are stuck being unable to re-finance.
If you sell a number of properties, you may be able to use the equity to pay down debt on your remaining stock to reduce the loan to value, and then be able to take out new mortgages.
This might be a compromise, but it means you would be able to hang on to at least a few properties to enjoy the income in your later years.
To arrange your cash offer, please complete the form to the right. Alternatively, you can call our freephone or local rate number, or simply email us and we will get back to you quickly.
Call us on: 0800 240 4628
For free, no obligation advice on how you can simply sell your property.