Why New Build Buy to Let Loans Went Wrong for the UK’s Mortgage Lenders

In this article, private rented sector consultant David Lawrenson of LettingFocus goes down memory lane to look at how and why lenders made a mess of buy to let loans for new build stock.

Newbies in residential property investment may wonder why there is a lack of lender appetite to lend on new build flats. Some lenders will not lend at all whilst others restrict loans to 65% or 60% of the value of the property.

 

In this article, which accompanies the forthcoming summer newsletter, I look at the various factors involved.

First, back in the early noughties there was a lot of fraud on new builds. Clever criminal gangs and sharp operators among the property clubs took advantage of weak lender underwriting and legal controls.

In the case of at least two large building societies, buy to let mortgage fraud (and the lenders failure to predict and stop it) along with poor lending on buy to let loans in general, was a key factor in why they had to be rescued by larger institutions.

Second, there was a huge over-supply of flats in some inner city areas which led to steep falls in both rents and capital values. Somehow neither the lenders nor their valuers seem to have either considered or seen the impact of a looming over-supply coming, even though people like myself, Richard Bowser and other experienced observers had identified and highlighted the risk right back before the year 2000.

Third, and linked to the second point, was the fact that a lot of the rights to market new build flats were gobbled up by property clubs and heavily re-marketed to individual amateur investors, many of whom saw themselves as property “investors”.

Many of these folk often lacked the experience or knowledge of what it takes to be a landlord. Also, many of these investors had 1) overpaid for the properties and 2) had to compete hard amongst each other for limited pool of tenants by slashing rents.

Fourth, a lot of the new build flats were of “average building spec” at best. Materials used in construction were often mediocre and many developments had a “samey” look to them, leading critics (like me) to refer to them for ever after as “identikit flats” or “buy to let ghettoes”

Fifth, with a lot of amateur landlords – many of whom lived nowhere near their “investments” – the managers of the estates were not exactly being lent on heavily to manage the developments properly. This meant many soon started looking dilapidated and run down, leading to further falls in rents and capital values.

With many amateur landlords defaulting on their loans and falling capital values, some of this bad debt inevitably ended up on the lenders’ books, adding to their fraud losses – and making them for ever more fight shy of new build buy to let lending.

The result was that lenders came to lose their nerve on new build buy to let loans. It still has not come back to this day and loan to values today for new build buy to let remain much lower than on older stock. Indeed, many lenders will not lend at all on this type of property.