Buy-to-let landlords seek keys to survival

As prices fall, so does equity, making remortgaging more expensive. Laura Howard looks for a way out
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The Independent Online

These are shocking times for homeowners. Mortgage approvals have fallen through the floor and house prices – after years of bumper growth – are now tumbling.

The group most in the line of fire are the buy-to-let investors who bought in the hope of capital growth. And last Monday's emergency nationalisation of Bradford & Bingley – which held 20 per cent of all buy-to-let mortgages – has brought their worries into still sharper focus. Coupled with the US Congress's delay in deciding on the $700bn bailout, the B&B decision prompted the remaining UK buy-to-let lenders to retreat even further.

A day after Bradford & Bingley crashed out of the market, UCB Home Loans and The Mortgage Works withdrew their entire buy-to-let mortgage ranges. They are expected to substitute more expensive deals that are harder to qualify for. Bristol & West and BM Solutions remained in the market – but with 75 per cent fewer deals.

Katie Tucker, technical manager at broker Mortgageforce, says: "When big players fall back, others have to follow suit to avoid being swamped by the riskier mortgage applications – and this leaves little affordable choice for landlords."

Those hardest hit will be more recent investors who borrowed the maximum 85 per cent loan to value (LTV) on their buy-to-let a couple of years ago, adds Ms Tucker. "Many will find that any equity they did have has completely fallen away as house prices have fallen by 12.4 per cent. Some could now be at 100 per cent LTV or even in negative equity."

Unable to switch lenders, these landlords could be forced on to their existing lender's standard variable rate (SVR), priced at a typical 7.4 per cent. And if the rent no longer covers the increased interest, they will have no choice but to plug the shortfall every month with their own money.

Buy-to-let mortgages – being investments designed to grow with rising house prices – are written on an interest-only basis. This means that as well as having no equity cushion generated by rising house prices, landlords don't have a cushion from capital repayments either. What's more, landlords have tended to mortgage with the highest LTV possible since interest payable on the asset – being a "necessary cost" – is tax deductible, Ms Tucker explains.

Steven Hilton, a spokesman for the National Landlords Association (NLA), says the current turmoil has "sorted the men from the boys" in property investment terms. "Smaller landlords who are over-indebted may run into some problems. This won't be helped by rising energy and fuel bills and now the cost of an energy performance certificate – between £75 and £100 – which became law for rental property from 1 October for all new tenants."

To get over the hurdle, more landlords are dipping into equity stored in their own homes and using it to bring down their buy-to-let LTV to meet the tougher criteria, says David Whittaker at Mortgages for Business, a buy-to-let broker which reports a steep rise in the number of "part-investment, part-residential" mortgages agreed in recent weeks.

Buy-to-let landlords take a "further advance" on their home mortgages and use this cash to pay off some of the buy-to-let mortgages. The idea is that the LTVs on the buy-to-let properties are reduced, giving the landlords the opportunity of better rates.

"To remortgage to a different buy-to-let lender, you will need around 75 per cent LTV rather than the previous 85 per cent. But bringing it down further to, say, 60 per cent gives landlords access to the cheapest rates. As the money that has plugged this gap is payable at the rates of the mortgage on their own homes, this is cheaper too. It is also still tax-deductible against the buy-to-let property."

But this is a risky tactic as they are increasing the level of debt on their homes and there are plenty of measures to exhaust first, Mr Whittaker adds. "If you are worried you may not be able to pay your buy-to-let mortgage when it comes up for renewal, the first thing to do is to contact your existing buy-to-let lender. It may agree to put you on to a cheaper retention rate rather than straight on to the lender's standard variable rate."

For example, if a landlord had been paying a two-year, fixed, buy-to-let rate of 5.29 per cent on a £150,000 loan, the monthly interest repayment would have been £661 per month. Moving to an SVR of 7.4 per cent would push this up to £925 a month. But with a retention rate of, say, base plus 1.95 per cent (6.95 per cent), the interest would come down to £868 a month. This rate is also likely to fall further if the Bank of England, as expected, lowers the base rate in the next couple of months.

It may still be worth shopping around, but look beyond the interest. BM Solutions, for example, is offering a 6.49 per cent, three-year tracker for borrowers with 25 per cent equity and 125 per cent "rental cover" – meaning that a monthly mortgage payment of, for instance, £1,000 must be covered by rental income of £1,250. "However, the arrangement fee is an eye-watering 2.25 per cent of the loan amount – that's £3,375 of a £150,000 mortgage," warns Ms Tucker.

Although they won't advertise the fact, lenders may also agree to help. "If your mortgage goes up to £550 a month, the rent received is £450 and you can't bridge the gap, the lender would prefer to take the £450 for an agreed period and roll up the interest," says Mr Whittaker. "Ultimately, the lender does not want the property sold at auction at a 35 per cent markdown any more than the landlord does."

It's also important to keep the wider "crisis" in perspective, says Mr Hilton at the NLA. In the first half of 2008, just 0.16 per cent of all buy-to-let homes were taken in to repossession by lenders, according to the Council of Mortgage Lenders. That said, figures for the second half of 2008 are likely to paint a bleaker picture.