Longer Term Tenancy Contracts and the Mortgage Works

Today, Mortgage Works owner, Nationwide has said it will allow landlords to offer longer term tenancies. We are delighted that our work at LettingFocus on this matter, over many years, helped make this happen.

Through our consulting work over a long period, we were able to show ALL lenders that the business case of keeping tenancy lengths in the private rented sector restricted to 12 months actually made little sense for lenders and the added risk to the lender of allowing longer term tenancies was small.

Our approach, therefore, was different to that of Shelter, whose argument focussed on the moral case, without making any business case to the lenders.

Indeed a press release LettingFocus issued just two weeks ago (and timed to coincide with the Council of Mortgage Lenders’ Annual Conference on Buy to Let and the Private Rented Sector) summarised a way forward that works for lenders. Here it is in full:

 

 

Most lenders place restrictions on their buy-to-let mortgages that limit the initial length of tenancies landlords can offer to 12 months. The lenders say this protects them, because, should the borrowing landlord default, it allows them to recover the asset and sell it reasonably quickly.

 

 

But insisting tenancies are limited to 12 months for the initial term fails to address the needs of the modern lettings market – especially the needs of families and retired people.

 

 

At LettingFocus, we say, “Restricting to 12 months is not essential – and there are other ways to protect the interests of mortgage lenders and borrowers.

 

 

We suggest lenders write a Special Mortgage Condition into their mortgage loan agreements with landlords which would allow landlords to issue assured shorthold tenancy agreements with initial fixed terms of up to 36 months.

 

 

The Condition would require landlords who opt to offer initial fixed terms of longer than 12 months to make it a condition of the tenancy agreement that regular annual rent reviews would be undertaken to keep rent levels in line with local market rents.

 

 

Our work advising mortgage companies shows this approach would ensure that, where a landlord defaults on mortgage payments and a Receiver of Rent has been appointed, lenders and borrowers positions would still be reasonably well protected because the lender would be able to continue to receive a market rent on the mortgaged property until either the tenant vacates or the term has expired – at which time the property could be sold into the market to clear the mortgage debt.

 

 

This would also mean that a tenant could – providing they continue to pay a market level of rent to the Receiver – remain in the property for a longer period, all the while helping to clear the landlord’s mortgage arrears.

 

 

By controlling what landlords do in this way, lenders could allow landlords to write tenancies with initial fixed terms of up to 36 months, at little increased risk to the lender (or their landlord borrowers).

 

 

Of course, we are fully aware that many landlords would not want to write initial fixed terms longer than 12 months for a variety of good reasons, not least because recovery under Section 8 takes longer and is always more tortuous than under Section 21. And many tenants do not want them either, for a variety of other equally valid reasons. (For both these reasons, we do not expect more than 3 to 5% of tenancies will ever be for more than 12 months initial fixed terms).

 

 

But allowing portfolio landlords the possibility and the flexibility to issue tenancies with fixed terms up to 36 months would be of some interest to those portfolio landlords who already know and trust a tenant. (And “portfolio landlords” are unlikely to want the property back in a hurry for personal reasons).

 

 

Initial fixed terms of up to 36 months would appeal to families with children of nursery or school age and to the retired. These tenants would like the certainty of remaining in a property for a longer period of time than just a year

 

 

There is certainly increasing pressure on mortgage companies to allow landlords to offer longer term tenancies.

 

 

The Council of Lenders Annual Buy to Let Conference is on 19th June. We hope lenders will be proactive and allow longer tenancies.

The London Assembly has heard our evidence and recently called for longer tenancies. Now it is time for some of leading lenders to act”.

I’m really pleased and delighted at this move – which is great for those tenants who seek more security and for landlords alike.

However, if I was advising Nationwide I would have advised them to restrict the ability to offer longer tenancies to experienced portfolio landlords with high equity levels.

Still, I’m sure Nationwide’s move will be copied by other lenders.

To read our various blogs on this matter, please go to:

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