Landlords Still Wait for Advice from Buy to Let Mortgage Companies
Mortgage companies writing buy to let mortgages could do more to reduce the possibility of future arrears.
It is a subject that we have written about extensively before at this blog, not least because the activities of the lenders exasperates not just would be borrowers but also mortgage brokers who often find many of the activities of the lenders hard to fathom. (To see what brokers think of mortgage lenders take a look at some of the comments posted on line at sites like “Mortgage Strategy.”)
I am adding to my own portfolio of properties and it’s clear to me that the mortgage lenders’ requirements have got even tighter than they were the last time I bought 15 months ago.
Certainly, the days when loans were handed out to landlords with just a credit check and a proof of valuation and rental income for the property to be mortgaged are long gone.
But that, is of course, a good thing, because lending practices in buy to let in the past were perhaps not as thorough as they should have been.
But while lenders now require a lot of info about borrowers before they will lend they still don’t require their borrowers to actually know much about the business of being a landlord.
The fact is that today, most landlords taking out a buy to let mortgage loan today are still given very little (or no) guidance at all from a mortgage company about how to make a success of the now very complex business of letting a property successfully and meeting their legal responsibilities as landlords.
In around 40% of lets the tenant is found by the landlord with no letting agent involvement. These landlords will their best to find the tenant, “reference check” them (to weed out potential problem tenants) and complete all the other administrative tasks too, with varying levels of success.
And for those landlords who do use letting agents, the quality of advice received is mixed at best. Whilst some agents are excellent there are also rogue letting agents who are more focused on their own incomes than in providing quality advice or even finding long term reliable tenants for the landlord.
Indeed, some rogue letting agents will actually structure their fee tariff so as to “churn” tenants in order to increase fees from landlords.
Advice from mortgage brokers is also scant. Most mortgage brokers are not set up to give detailed advice to landlords on how they can run their business successfully, (though some, being landlords themselves, will occasionally impart some knowledge informally for their landlord clients.)
Associations of Landlords
Today, less than 30,000 landlords are in a landlords association, just over 25,000 have bought my book and maybe a few thousand more are in local authority administered landlords’ accreditation schemes of one sort or another. Even if the 25,000 with my book are different to the 30,000 in the landlords associations, that’s still a pretty tiny bite out of the 1.3 million landlords now operating in the UK.
So why does this matter at all?
Being a Landlord is a More Complex Business Today
Well, the trouble is that the business of being a landlord is very much more complex today than it was back in 1996 when buy to let mortgages were born.
Back then the business of being in business as a landlord was much simpler than it is today.
In 1996 there was, for example, no requirement to register deposits in a tenancy deposit scheme and hence less incentive to do a thorough inventory.
There was no need for an energy performance certificate, disability rules were simpler, there were fewer rules on HMOs, there was no such thing as licensing schemes and there was a different and simpler set of health and safety rules.
There were also a much smaller number of people on Housing Benefit / Local Housing Allowance – a particularly hard and challenging sector for landlords to get to grips with.
And yet, despite the complexity of buying to let having moved on, the buy to let mortgage today is still a simple “take it or leave it deal”, with most mortgage companies making no attempt whatsoever to help landlords understand what they need to do or what they need to know.
This may reflect an assumption that landlords will somehow “find out what they need to know” from letting agents or even from mortgage brokers and that they will “muddle through.” But, as we have explained, this is a misplaced hope.
As a direct result of this information vacuum the buy to let arena has been inhabited by a host of “get rich quick in property” gurus peddling new and dangerous ways for novices to get into property with “little money down.”
It’s possible that many mortgage lenders directly lost money as a result of some of the past activities of some of the supposed gurus who, all too often, encouraged landlord-investors to over-extend themselves using techniques like “next day remortgage” loans taken out in conjunction with bridging loans.
Mortgage companies failed to fully appreciate what was going on and in many cases ended up “fire selling” properties that had been bought by landlords using esoteric techniques and hoping to “get rich quick” but often lacking any idea about how to actually manage a let property.
Lack of Information
The paucity of information has reduced and continues to reduce a private landlord’s chances of being successful in buy to let. And unsuccessful landlords who are losing money are a higher risk to the mortgage companies because they are more likely to default on their mortgage, costing the lender money (as not all of the losses can be recovered from the borrower.)
Even the admin systems operated by mortgage lenders for buy to let seem out of date. (Buy to let mortgage statements from two of my current lenders run to end December, not to the end of the tax year – which, of course, is the relevant date for all landlords having to complete tax returns!)
The Penny Drops
On 26 March 2010 the Treasury published Mortgage regulation: summary of responses announcing that it would reconsider changes to the form of regulation proposed to protect consumers in the buy-to-let sector. The paper said “The Government will examine how to ensure the impact of regulation on the buy-to-let market is proportionate, particularly for individual professional landlords. It will also consider how best to protect consumers from the range of possible causes of detriment that may result from buy-to-let including, if appropriate, the consequences of poor investment decisions as well as unaffordable borrowing.”
Subsequently, the coalition government indicated that if industry did more to provide information for landlords it may not feel the need to introduce regulation of buy-to-let mortgages.
In response the Council of Mortgage lenders has now held discussions with the National Landlords Association (NLA) and others about how the industry can provide more information to help landlords.
The penny has finally dropped, it seems, but at LettingFocus we wonder, why the Council of Mortgage Lenders did not seize the initiative earlier.
How LettingFocus is Helping Mortgage Companies
We are pleased to say we are now working with a few more forward looking mortgage companies to raise their game in respect of what they provide landlords – the knowledge they impart to landlords, the way they control client and property risk, their admin and their customer service.
It makes sense for them because better informed landlords are far less likely to make a mess of their business and default on their mortgage loans. For many other lenders, however, the penny has still not dropped.
MORE ABOUT LETTINGFOCUS AND WHAT WE DO
LettingFocus.com is the home of Private Rented Sector expertise and Landlord Information and I’m David Lawrenson, a landlord and property investor myself for over 25 years and author of “Successful Property Letting” – the UK’s top selling commercially published property book for the last 3 years. 25,000 copies sold.
Services to Businesses and the Public Sector
Primarily we are consultants to a range of organisations including banks, building societies, local authorities, social housing providers, institutional investors and insurers. We help them with their landlord facing or buy to let product strategies, marketing and services.
This work includes helping banks improve their buy to let mortgage lending practices and helping housing associations / local authorities procure supply of properties from private landlords (private rented access schemes, local letting agency models etc.)
We also write for property websites and we are regularly quoted by the media.
Services for Private Landlords
We also find a limited amount of time to help landlords and property investors by coaching them in how to make money in the private rented sector using ways that work, which are ethical, fair to tenants and which involve minimal risk to the investor. We pride ourselves on giving independent unbiased Buy to Let Information on a coaching basis or through our (very occasional) group seminars.
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