Buy to let landlord mortgage arrears
A report from UK Finance has reported a 20% increase in landlords with serious mortgage arrears which signifies all is not well in the buy-to-let sector.
The following factors are likely to have contributed to these arrears:
- The increase in Bank of England base rate last year (with the warning of further rises this year)
- An increase in the time it takes to evict a non-paying tenant during which the landlord has to fund the mortgage alone
- The 3% stamp duty surcharge on second homes from April 2016
- A slowdown in the property sales market making it more difficult for a landlord to sell up
- An increase in compliance costs (red-tape)
The nail in the coffin leading to mortgage arrears tends to be when the above factors coincide with a deterioration in the landlord’s personal financial situation. This could be redundancy, divorce or anything else which prevents them having the required alternative income to cover extra property costs.
Ominously, it appears the worst is yet to come with a tapering of the mortgage interest relief for landlords which begins from 17/18. In other words, any landlord with an income tax rate exceeding 20% will have an increased tax bill for this current tax period.
Fortunately, the tax change is being phased in over a 4 year period to avoid a shock to the market which could then create a sudden sell off leading to a crash. However, if rents do not rise to offset increasing costs, a buy-to-let property may begin to feel like a liability rather than an asset.
Following the credit-crunch, we at Gibson Hewitt met a number of buy-to-let investors who had built their portfolios at the top of the markets. Since this was the era of 100% LTV mortgages, these landlords were left in a desperate negative equity position following the crash. We used Individual Voluntary Arrangements, (“IVA”)s, to enable these landlords to unwind their positions in an orderly fashion and thereby limit the impact on both them and their creditors.
10 years later it looks like a new storm is brewing for buy-to-let landlords. Given the dreadful lack of liquidity in the sales market, anyone needing to sell now will be faced with the following (unappealing) choices:
- Sell with a sitting tenant (rarely ideal)
- After the end of a tenancy, sell at discount from full market value to ensure a quick sale
- Market their property fully (and fund the mortgage themselves during the vacant period)
The question is; will these current problems turn out to be the tip of the iceberg which triggers a rush from the buy-to-let market? Most likely there will be a partial exit by the more highly geared landlords. This will in turn reduce competition for tenants and lead to an eventual increase in rents. We would therefore suggest landlords take pre-emptive measures now to ensure they can weather the storm and benefit in the aftermath.
If you are a landlord who is struggling financially, contact Lynn Gibson on 01932 336149 for more information or to arrange an initial FREE meeting at which we can explain your options.