Asubstantial number of mortgage lenders have relaxed the terms of their buy-to-let deals, sparking concerns among industry experts that property investors are becoming increasingly vulnerable to small fluctuations in interest rates or modest hikes in unemployment.
As competition in the buy-to-let market has intensified, many of the biggest providers have lowered the demands on the level of rental cover expected from their properties and lifted their levels of permitted borrowing as a proportion of the value of the property.
A number – including GMAC, the financing arm of General Motors, and Northern Rock – now offer mortgages that allow the expected income from rent to equal just 100 per cent of the monthly mortgage interest, compared with the industry average of 130 per cent. Other providers, including Bristol & West and Bank of Ireland, offer deals where the rent needs to cover 115 per cent of the mortgage interest.
Mortgage providers say the most relaxed levels of rental cover – which often incur higher fees and may demand minimum earnings levels – are generally offered through intermediaries to higher-net worth professional buy-to-let investors who have a portfolio of properties and are comfortable with risk.
But there is concern that these low levels of rental cover allow little or no margin for properties falling vacant, the cost of maintenance and repair work or a decline in rent.
Simon Tyler of Chase De Vere Mortgage Management, the broker, says: “Only requiring 100 per cent rental cover does make more buy-to-let investments viable, but be warned, it also increases the risk of investors needing to subsidise the mortgage payments out of their own pocket.
“If increased competition in an area among landlords led to rents falling, the investor would have to make up the shortfall. The more traditional requirement for rent to cover 120-130 per cent of the mortgage interest gives the borrower a little bit of a buffer against this kind of situation,” he adds.
Ian Fletcher, director of residential property at the British Property Federation, says there would be concern if the 100 per cent rental level became prevalent in the industry and urges providers not to relax rental cover that far. “The 130 per cent standard rent cover is there for a reason. It leads to prudent lending and helps ensure there are funds for maintenance and repair,” he says.
He adds: “Particularly at this point in the current rental cycle with things not as buoyant as they have been it is probably a time to tighten the criteria rather than relax it.”
Savills, the property consultancy, estimates that there is currently 40 per cent less investor activity in the buy-to-let market than there was at its peak in early 2004.
After several years of rapid growth, buy-to-let activity slowed in the second half of last year and has continued to cool off in the first six months of this year. But providers are confident the market will be held up by more potential first-time buyers opting out of buying to rent in fashionable areas, as well as the growing number of students requiring accommodation.
The trend towards more flexible buy-to-let mortgages was sparked last year when successive interest rate rises meant borrowers could no longer meet the standard levels of rental cover criteria and lenders reassessed their positions to attract new borrowers.
Ray Boulger, senior technical manager at John Charcol Independent Mortgage Brokers, says providers have become increasingly confident with buy-to-let deals as arrears rates have been consistently low and the people taking them out have mostly been asset-rich professionals with good credit histories.
Miles Shipside, commercial director at Rightmove, the property website, says that over the last few months there has been a clear shift among the more innovative providers to make the terms of buy-to-let mortgages more attractive as they fight to win market share from traditional buy-to-let lenders. He expects this trend to continue, especially in the run-up to the pensions simplification in April, which will allow investors to put residential property into self-invested personal pensions (Sipps).
“There hasn’t yet been a shift from the traditional lenders but it is likely that they will follow suit,” he says.
Lenders have relatively high levels of freedom in their terms for borrowers as buy-to-let mortgages still fall outside the remit of the Financial Services Authority, even though the regulator has assumed responsibility for conventional mortgages. And as smaller providers relax their criteria, the pressure is building on the traditional lenders to compete.
However, many of the more established lenders have so far shied away from relaxing their demands. Andrew Moss, product development manager for buy-to-let mortgages at Mortgage Express, Bradford & Bingley’s specialist lending arm, says the lowest rental cover over interest repayments they require is 125 per cent but they still do most of their lending at 130 per cent. “At that level we are comfortable in the market and happy with the quality of our book,” he says.
UCB Home Loans, the specialist lender of Nationwide, this week launched a buy-to-let mortgage calculated purely on rental yields, alongside its traditional mortgage, that also takes into account other earned income.
But the mortgage provider maintained its criteria that the anticipated rental income must be equal to at least 125 per cent of the monthly mortgage interest payments, calculated at Bank of England base rates plus 1 percentage point.
Keith Astill, managing director of UCB, says: “We work on the basis that rental properties generally have a four-week void period per year and there is a need to build caution into the calculations.
“As a responsible lender we believe that in most circumstances anything under 125 per cent rent cover is unwise,” he adds.
