BTL Buy To Let Mortgage

  • Designed specifically for investors / landlords, BTL loans are based, not on the affordability of the borrower, but on the viability of the loan.  Viability is based on two main factors: loan to rent ratios coupled with loan to value.
  • This is in contrast to home owner /occupiers, whose mortgages are based on less reliable ‘affordability’, linked to their “earned income”.  A job can be lost in a moment; rental income is more secure.  Rental income, however hard gained, is not categorised as ‘earned’.
  • Bye Bye Buy To Let:

  • Proposed EU rules could see new BTL mortgages withdrawn.
  • Reckless lending and borrowing resulted in some home owners losing their homes and in rare cases, investors losing their investment properties.
  • This resulted in cries for regulation.  It is right that residential borrowers are protected by regulation.  And to a lesser extent commercial borrowers also.
  • Analogically, the problem could begin with a life-saving transfusion of regulation, to which the patient investor, together with the entire economy and population, is tragically allergic.  The protection intended to cure, could kill vulnerable patients.  But will Dr. EU, first test for an allergic reaction, before emptying the syringe into the lifeblood of the UK housing market?!
  • How might any new EU rules curtail new BTL mortgages?

  • Current BTL mortgages will continue until their terms expire, after which time loans cannot be renewed as a BTL.
  • The consequences would be manifold.
  • Existing mortgages falling due for repayment may not be extendible!
  • This is the point at which investors will be waving bye bye, buy to let.
  • Regulation

  • The reasoning for requiring “affordability” in light of historic economic evidence is compelling and actually sounds prudent, at first; but upon closer examination proves specious.
  • It is imprudent to categorise landlords and investors as ‘residential borrowers’ in need of ‘protection’.  These are savvy business investors, normally required to be existing home owners, whose affordability is already pre-established by track record.  In addition borrowers must pass strict Buy-To-Let rules and satisfy the loan to rent ratio LTR is, in fact, affordable. This is easily verified by conservative surveys conducted by independent surveyors, who are accountable to the regulatory body RICS – Royal Institute of Chartered Surveyors.
  • With all this existing protection and the low number of BTL failures, what is the need for further regulation?  It is as un-cool as putting a gilded notice on a fridge, warning: ‘it is cold inside – wear a coat before opening!’  Protection rackets are not normally linked to the EU but this stretches beyond the borders of the English Channel and any logic.
  • Immediate Effect

  • The wider implications are really serious for all.
  • Lenders will be unable to lend if investors cannot include rental income to demonstrate affordability.
  • Investors could in future be unable to: borrow, re-mortgage or extend mortgages.
  • Consequences

  • For those who are low geared and well established, this might give rise to a minority monopoly resulting in increased rents in the absence of significant competition.  Paradoxically, since improving competition is one of the aims of the directive calling for reform, the opposite effect is likely.
  • This will come at the expense of the majority of landlords who might ill afford mortgage redemptions in the absence of the BTL model.
  • In turn, this could precipitate the sale of entire property portfolios.
  • Were this to occur, an unplanned property sale would mean a massive CGT liability could wipe in a stroke any property portfolio like a downward vortex.
  • Consequently, tumbling house prices could erode the savings even of non-investors.
  • Renters will also be affected if they are evicted and unable to find alternative housing.
  • A double whammy awaits, causing a double dip too many.  Catastrophic consequences for the British economy entirely ‘unhomemade’, by ‘Euromade’ mania.
  • This is compounded by the cost of mortgage transfers, if they are available. Some borrowers may have lost credit status since mortgage inception, preventing their securing a transfer to any ‘responsible’ lender. Their only option is to redeem. Meantime for some, particularly in the north, equity falls means a shortfall even after redemption.
  • A mass exodus of BTL mortgages would see creditworthy borrowers relinquishing low rate MX deals ahead of any approaching deadline introducing any new rules.
  • Lenders will not have sufficient funds and will selectively ration whilst raking in new business. Fees and interest rates will mirror their temporal monopoly.
  • Further, borrowers imprudent enough to have fixed-rate mortgages will also get clobbered with early redemption penalties.
  • The problem goes much deeper.  See separate article in conjunction with this one for the impact for MX customers – this is almost worse, because it is not a proposal it is reality now
  • See also:
  • Draft Directive on credit agreements relating to residential property.

What are your thoughts?

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