Mortgage Loans and Housing Benefit and Why a Selective Approach is the Better Option
David Lawrenson of www.LettingFocus.com observes the latest mortgage lender U turn on allowing landlords to let to housing benefit tenants, but says that rather than a “blanket” approach of either allowing or not allowing landlords to do this, a better way would be if lenders “selectively” allowed it – with the decision linked to other variables such as landlord experience and loan to value level. Lenders should also provide more information to landlords.
In last weeks blog, I reported how Nationwide had removed their somewhat short-lived restriction preventing landlords letting their properties to tenants on housing benefit.
The Nationwide move was quickly followed by Lloyds Bank who also abandoned their identical (and rather more long standing) restrictions on those landlords who have loans from their BM Solutions buy to let unit.
Following these lender moves, I received quite a few emails from people in government, housing associations, tenants groups and the media congratulating me on making this restriction more widely known publicly – and leading to these two lenders abandoning the restriction.
One said, “People at the bottom of the housing ladder who find very few landlords will let to them anyway, will today have more housing options, thanks to you.”
It’s quite likely that my talk to the Council of Mortgage Lender’s conference some 14 months ago (as well as my appearance and evidence to the members of the London Assembly’s PRS committee) will have had a part to play in these lenders’ decisions. The media, especially “The Guardian” newspaper and the “Mortgage Strategy” magazine may have done the rest.
A little clarification is required though – because I did not set out to be a kind of “hero of the people” on this issue. Indeed, my work often involves advising mortgage lenders on how to make more of a success (in other words make more profit) from their buy to let mortgage products.
My position has always been that mortgage lenders should have always allowed some landlords to let to people who are on housing benefit, not just because it is good PR to do so, but because not to do so eliminates a profitable niche market from the landlord and lender.
However, the government’s changes to welfare entitlements over the last 2 years and especially, the looming roll out of the Universal Credit system has made letting to people on housing benefits a lot more risky for landlords than it was before (and hence also for their lenders).
That is why my advice to lenders is yes, you should still allow landlords to let to people on housing benefit (and naturally you will get some good press and hopefully also, even some kudos from government from allowing this). But given the welfare changes that are happening, and the consequential increased risk, it might be better if your underwriting approach allowed only more experienced landlords to do such lets or linked the ability to do HB lets with only those mortgages where the loan to value was lower than the normal level. This would allow lenders to control the risk. Another way would be to require landlords to have a guarantor for some housing benefit lets.
By allowing all landlords to let to any benefit tenant, these lenders have possibly gone from the frying pan into the fire a little.
Going forward, our view is that as long as the government continues with its current plans for Universal Credit, we would recommend that lenders pursue a more selective approach.
Lenders Lack Control Over What Landlords Do
Of course, the reality is that lenders don’t have much control on what landlords do. Every day hundreds of tenants in the private rented sector will suffer changed circumstances, need to go onto housing benefit and most won’t tell the landlord – most don’t have to and most won’t anyway. And of course a lender will never ask a landlord to end a tenancy where this has happened (for the very practical reason that the PR impact would be dreadful – and rightly so).
So lender control is rather limited anyway, which is why we say that lenders should also provide more helpful advice online to landlords to allow them to manage their lets better or point them to where they could get this advice. Few do this.
David Lawrenson’s book “Successful Property Letting – How to Make Money in Buy to Let” is the UK’s highest selling personal finance book and is a practical guide for landlords.
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