A number of landlords are beginning to default on their buy-to-let mortgage repayments as a result of over-supply in the market, according to David Humphreys, director of Buy to Let Ltd. He has found landlords, especially in the middle and new-build markets, are facing voids and selling up.
‘With current volatility in the market, landlords are considering selling their buy-to-let properties. There are indications from lenders that landlords are beginning to default on their repayments. One lender has said there has been an increase in the number of second and third calls for direct debits,’ he said.
Many buy-to-let landlords are small-time investors feeling the pinch due to a lack of extra capital to cover costs in between tenancies. Those in London are the hardest hit as the market is oversupplied with properties which are too expensive for many tenants.
Rob Clifford, managing director of Mortgageforce, said: ‘Any market which has grown at the pace of this sector will experience defaults and debts a couple of years into its cycle. Some landlords are finding a gap between tenants and as some have very little personal capital in the event of a financial problem, what will they pay out last? They take their own mortgage, car and other expenses first which means their buy-to-let property could be at the bottom of the list.’
Roger Hillier, product development manager of Mortgage Express, said: ‘It does not surprise me this is happening in some areas where supply exceeds demand, for example, in pockets of London.’
Yields in London have fallen dramatically according to Michael Giblin, IFA for the Falcon Group.
He said: ‘This is no surprise in London where yields are dropping massively. People jumped into a fast-expanding market. If there are voids it is inevitable some will feel the pressure.’
According to Skipton, one reason for borrowers defaulting is lenders not imposing strict enough lending criteria. Colin Dale, head of lending of Skipton, said: ‘Lender criteria is important, we insist rental income must cover the mortgage by 1.5 times to avoid this problem.’
Sub-prime buy-to-let products could become more prominent as a result of landlord defaults or debts.
John Malone, national mortgage manager at Scottish Amicable, said: ‘It won’t be long before there is more sub-prime buy to let. Many people entered this market late and some are finding it difficult to let. We have gone through a scenario where people have bought anything and are finding it hard to sell.’
A rise in interest rates could also spell a further shake-out in the market but won’t necessarily lead to a crash, according to Malone: ‘If interest rates do go up and rents come down, it will put a strain on the borrower. It won’t cause a property crash ‘ but a property correction.’