In Q4 of 2017, there were 5,100 buy-to-let mortgages in arrears of 2.5% or more of the outstanding balance, or two per cent more than a year earlier. Of those, 1,200 were in significant arrears – that is 10% or more of the outstanding balance, and it was these landlords in serious arrears that had risen the most – by 20% in a year.
So what has happened in the past year that has caused landlord arrears and possessions to rise at such a rate?
Pre-crisis, between 2003 and 2006, a huge number of landlords bought properties with interest only buy-to-let mortgages, thinking that property prices would continue to rise at the rate they had been.
They planned to benefit from the monthly income brought from the rent (i.e. that the difference between their mortgage repayments and the rent they were charging) and then cash in big at the end of the term when they sold the property on for a considerable profit following a decade or more of rises in the value of property.
Unfortunately, it hasn’t worked out that way. Since the credit crunch, when prices plummeted, landlords didn’t want to sell the properties that failed to achieve the capital growth expected and with no other repayment vehicle in place, the landlords obviously didn’t want to sell if the property wasn’t going to at least cover the debt, let alone, make a profit.
Lenders in stasis
The lenders themselves didn’t take much action and many let these interest-only deals roll on, with landlords continuing to pay interest only rates after their terms had ended. While some would then have been looking for alternative repayment vehicles, many didn’t, leaving them in a situation where they still owed the full capital on the property, but had no way of paying it back without going into further debt.
Earlier this year, the FCA launched a Thematic Review on treating interest-only customers fairly. As part of this review, lenders are urged to take action on all the interest only customers that are either approaching the expiry of their term or have already passed it.
And while in the residential market, the review has encouraged lenders to work with borrowers to explore alternative repayment strategies– in most cases remortgage or with older clients, equity release – to avoid repossession, the FCA’s guidance and review didn’t cover the buy-to-let sector.
Regulatory pressure forces repossessions
But lenders have been forced to take action on these landlords who have been ‘rolling’ along for the past few years.
The result is a huge surge in interest-only buy to let repossessions and arrears. Due to a lack of a repayment vehicle, many landlords are now left facing difficulties. Many will then evict their tenants – often using the controversial Section 21 notice – in order to allow them to sell their property with vacant possession. But if they find they either cannot sell their property or struggle to sell at the price they need to in order to clear their debt they can find themselves trapped.
So, in essence, it is the perfect storm – high LTV interest-only deals, coupled with slow property price growth and FCA guidance which pushes lenders to take action on landlords with interest-only deals has come together to cause the highest landlord possession rate we have seen in years.
And actually, the situation is potentially much worse than the MoJ and UK Finance figures suggest as they do not include properties that are being managed by LPA receivers. When a buy-to-let mortgage falls into arrears, the lender has the right to appoint an LPA receiver. They then step into the borrowers’ shoes and make decisions on their behalf. The LPA collects the rent and after deducting costs remits this to the lender, ultimately with the view of developing the most appropriate exit strategy for the property.
So what can landlords do?
Well, it is clear the interest-only issue is only going to escalate, both in the buy to let market and also for borrowers with an owner-occupier mortgage. This is why it is so important that lenders focus on these borrowers now, to help to prevent the issues being experienced by interest-only customers currently reaching maturity.
For lenders who do not have the expertise in-house to engage with the borrower and ensure a solution is found, using a professional third party may well be the most effective way forward. This can not only find a positive solution for the borrower but can also help protect the lender’s reputation.