The buy to let mortgage market faces crisis as banks tighten their lending criteria and raise their interest rates. Many landlords have profited over the last decade from buying property and renting it out to tenants. House prices have increased and mortgage deals have been plentiful. However since the collapse of part of the American mortgage market due to sub – prime lending, interest rates across the global have been rising.
Even landlords with good credit histories and reasonable sized deposits could face problems finding a profitable buy to let mortgage in today’s economic climate. But for those who already have these types of mortgage the outlook seems even worse. Landlords who brought one of the plethoras of new build city centre flats within the last five years are suffering from having to find people willing to pay high rents to cover the high interest rates. Often these new built properties have been over valued and sold for considerably more than their market rate. This means that bigger mortgages were required to purchase the properties, many of which have actually lost value in recent years. Now with the banks increasing interest rates across the mortgage market, it is costing landlords even more to maintain these flats.
When the time comes for landlords to re-mortgage they may find it extremely difficult to find a comparable deal. Morgage lenders in the UK are withdrawing their buy-to –let products faster than their mainstream ones and have pushed up the rates for existing high risk customers to encourage them to move. Other lenders have stopped offering their products to new borrowers all together. But it’s not just the landlords that are suffering; some lenders are finding it difficult to stay afloat also. Paragon, which specialises in lending to landlords, has said that it is dangerous close to collapsing and will have to cut a third of its staff in order to keep afloat
A number of mortgage lenders are stepping out of buy- to- let market altogether, whilst others are refusing to offer loans to landlords wanting to purchase new-build properties. This means that landlords are more likely to have to stick with the mortgage rates that they are offered by their current lenders when their lower rate deals run out. Typically the standard variable rate is considerable higher than the cheap deal used to enticed landlords when they first took out the mortgage. This means that higher rents are then needed in order to cover the raising costs. However rents have not kept pace with the increased interest rates of the mortgage market and now landlords have to pay the shortfall themselves.
There is little that can be done in these times to ease the burden on buy-to-let landlords in this situation. Selling the properties may be an option but some new build flats are now worth less than when first purchased, so will result in negative equity if they were sold. Riding out the storm seems to be the second option but if landlords are to do this they should ensure they have completed a thorough search of the market and have the best product they can find to match their needs.
