David Lawrenson of LettingFocus.com explains why more borrowers will try to “game” mortgage lenders by applying on buy to let mortgages for loans on properties that they intend to live in themselves.
One of the likely outcomes of the Mortgage Market Review (MMR), which now applies to all residential loans, is that getting a mortgage for residential mortgages might prove that little bit harder.
MMR requires lenders to see more proof of affordability than ever – so cue more potentially intrusive questions to ascertain what you are spending your money on and whether you can really afford the mortgage loan.
So, whilst 90% loan to value mortgages are available (though at stonkingly high margins over Bank of England Base), the MMR is just another factor which means you may not get that level of loan after all.
Buy to let mortgages, however, are not covered by MMR – and nor are they regulated like residential loans are (which is one of the reasons the FCA decided to hang borrowers out to dry when they let West Bromwich Building Society and other lenders scandalously renege on their tracker mortgage commitments).
And though lenders still need to do their checks on borrowers who apply for buy to let mortgages, there is often not a minimum personal income requirement in place.
Nevertheless, there will be lots of other reasons why a lender will reject or scale back a buy to let mortgage application, but the two main restrictors on buy to let will usually be the loan to values (usually the limit for most lenders is 75%) and the rent to income ratio (usually the rent must be at least 25% more than the interest payments on the mortgage at a notionally defined interest rate, which today is typically set at 5% or 6%).
The rent to income ratio requirement often means that in practice most buy to let loans come in at well below the 75% loan to value level, leaving borrowers often needing to often quite a lot more than 25% of the property value as a cash “deposit”.
“Gaming” the Mortgage Lenders
Still, there are plenty of people out there who have at least 25% of the value of a property to put down, but who don’t have, or cannot show, the necessary level of income to get any residential loan. Many of these will be the self-employed, who perhaps cannot formally evidence the income required by the lenders.
Given that buy to let mortgages are often not that more expensive than residential, there will be many borrowers who will apply for a buy to let mortgage, knowing full well that they intend to live in the property.
This, of course, is a breach of the mortgage terms and conditions and, if the lender finds out, the consequences for the borrowers can be very serious indeed.
So mortgage lenders are now being very careful and we know from our corporate consulting work for lenders that the smarter ones employ a battery of checks to identify and stop this kind of thing from happening.
Still, borrowers will inevitably try to “game” the system. Some borrowers will argue that the lender does not really care and won’t investigate too hard, just as long as the mortgage is being paid. And after all, isn’t the lender getting a higher interest rate than they would get if the mortgage was a residential loan?
Unfortunately, this kind of thinking, which you may hear at the more spammy property seminars, can be very dangerous.
The reality is that there are real risks in cheating mortgage lenders. One of the most significant of all would occur if the borrower was to suffer a total loss following an insured event. In this case, the insurer would find out that the loan type was wrong and the claim would almost certainly be rejected. Plus, the borrower would have to pay back the entire loan to the lender – not easy when the property lies smoldering and in ruins.
So, we advise borrowers to never try to “game” lenders by applying on a buy to let loan and then living in the property.
And if you move back into a property that has a buy to let loan on it, always tell the lender, even if it just for a few months*
Remember, on buy to let loans, the lenders are not the “Mr. Nice Guys” that they are supposed to be on residential mortgages. There is no forbearance in the event of non-payment of the mortgage loan. And as we have seen from the antics of West Bromwich, Skipton and Manchester Building Societies and the Bank of Ireland, they are not even prepared to honour mortgage contracts.
So, do you still think the risk is worth taking?
* It would of course help matters if lenders did not make excessive charges for giving “consent to let” or “consent to not let” where borrowers wish to change the use of a property from being their own home to being a let property, or visa versa.
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David Lawrenson, founder of LettingFocus also writes for property portals, speaks at property events and is regularly quoted by the media.
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