Buyers let down by buy-to-let

Vantis warns buy-to-let landlords to seek advice early and negotiate with lenders as repossessions rise.

Vantis, the Aim listed accountancy, tax and business advisory group is urging buy to let mortgage holders to ensure dialogue with lenders is started early if they are struggling to meet monthly payments as repossessions reach record levels. In November, the Department for Constitutional Affairs released figures for mortgage repossession actions entered in the third quarter 2006 of 34,626, a rise of 15 per cent on the same period last year.

Frank Wessely of Vantis Business Recovery says investors in this sector of the market are at particular risk after a rising market led to an increase in the number of consumers becoming small scale buy-to-let landlords. According to Wessely, when problems occur, many mortgage companies will often not allow landlords any leeway and apply to Court for early repossession, even when only one month’s mortgage payment has been missed.

He said, ‘‘Buy-to-let has boomed in recent years, but supply is outstripping demand in certain areas. Landlords aren’t generating the incomes they anticipated. Those investing in new-build developments have found the going particularly tough because the market is awash with these developments so rental yields can be restricted. We would urge investors to talk to their mortgage provider immediately if they have concerns. They may be able to negotiate a longer term or even a different product to make repayments more manageable.’’

According to Wessely, part of the problem lies in amateur investors failing to factor in costs such as buildings insurance, maintenance and management fees or void periods when the property stands empty between tenants. He continues: ‘‘Negative equity is again on the lips of buy-to-let landlords as they find lower yields than anticipated are failing to cover mortgage payments. There has been a definite fashion in buying residential property and then renting it out, and the more exotic the location, the more des the res! However, higher interest rates and over-optimism about rental income have left some buyers struggling to keep up repayments.’’

According to research by buy-to-let specialist Landlord Mortgages, yields in England dropped to 5.87% in the third quarter of 2006, down from 5.97% during the previous three months. The situation looks set to worsen, too, with the Council of Mortgage Lenders (CML) forecasting higher levels of arrears and repossession to come. The CML expects 130,000 mortgages to be more than three months in arrears by the end of 2007, up 10,000 on its previous prediction. Furthermore, the CML's estimate for repossessions has been increased by 25%, to 15,000 repossessions in 2006 and 2007 apiece, from the 12,000 predicted in February.

Industry warnings have prompted lenders to tighten their lending criteria on new-builds amid concerns that valuations have been too flattering because they failed to take into account separate incentives offered by developers. There have also been concerns that an oversupply of rental units in some developments has been depressing yields. Last year, Portman Building Society became the first lender to refuse to offer buy-to-let mortgages on new-builds. Several lenders have increased the deposits required on buy-to-let mortgages for new-builds to 25 per cent of the property’s value, compared with standard minimums of 15 per cent.

If the trends continue, thousands of people could be forced from their homes unless they can agree new terms with their mortgage lenders. Wessely also warns that it’s not just buy-to-let investors who could get their fingers burnt: ‘‘We’re also seeing owner-occupiers in lower value properties, perhaps where the occupants have bought from the council under right-to-buy schemes, running into trouble.”