Paul Walshe, Moore & Blatch
The buy-to-let (BTL) boom continues unabated. According to the Council of Mortgage Lenders (CML), landlords took out 152,500 mortgages in the first six months of 2006, up 56 per cent on the same time last year and setting a new record.
With over a million households now living in BTL properties, many are talking about a bubble in the market, while others shout killjoy. What is beyond doubt is that the heady returns made by many over the last few years, combined with on-going mistrust of many traditional forms of investment has led to many inexperienced investors jumping on the BTL bandwagon.
Professional landlords, or those with many years experience are well aware of the costs, as well as the benefits of BTL and plan their finances accordingly. Property, however, has newer investors enthralled – they do not necessarily think about the costs of repair or plan for months without rent, and some are so convinced of the benefits that they are prepared to subsidise their tenants – investing in properties where the rental income does not cover the mortgage. With one-in-five landlords having entered the market in the last few years, it remains to be seen how they will handle a worsening market environment.
It is these investors who we believe are most likely to generate problems for lenders. The upward trend of rates, combined with social factors, such as increasing relationship instability, will put pressure on novice investors as they struggle with unanticipated periods of vacancy, rising mortgage repayments and changing personal and financial circumstances – a joint BTL investment may prove too much for one party to manage on top of other day-to-day costs if the relationship breaks down.
We are particularly concerned about new build properties, often purchased off-plan, with the expectation of capital appreciation and then a tenant paying a healthy premium rent due to the property being brand new. These have often been marketed aggressively with incentives to make the purchase more attractive, yet often tenants are reluctant to pay the higher rent required to cover the mortgage.
In these instances, it is essential that lenders act quickly in order to maximise the value of the property. Unlike residential mortgages, where we are dealing with what may have been someone’s home for many years, BTL properties were bought as an investment and the approach should be as it would with any other investment, such as equities. As most BTL properties have been purchased in the last decade, long-term sitting tenants are also unlikely to feature.
Debt recovery
At the simplest level, the amount of money received for two similar properties could be markedly different. It is a popular misconception that primary residence owners trash their property prior to it being repossessed. Almost all want to maximise the value and so are just as fastidious about it. Tenants, on the other hand, especially ones who have not paid and whose deposit has been exhausted due to rent payments, might take a different view, such that the material value can be greatly reduced.
Legislation has made the situation easier but, from the lender’s and indeed broker’s perspective, it remains a more problematic procedure than conventional possession. The Housing Act of 1988 was the catalyst for the BTL market, shifting the balance in favour of landlords by guaranteeing that they could recover possession at the end of the term of the tenancy and there was a surge in rental properties just in time to meet the growing demand caused by the recession.
The table below shows the number of landlord possession actions entered and orders made by quarter since 2001. During the second quarter of 2006, 32,498 landlord possession actions were entered and a total of 22,074 orders were made – 12,663 of which were suspended. (The table below shows the general rise in mortgage repossessions.)
Social and private landlord possession proceedings issued in the County Courts
The correlation between general mortgage possessions, possessions made by landlords and possessions of landlord properties is yet to filter through, but the recent boom in BTL property ownership will certainly create a problem for the novice investor who is overexposed to circumstances beyond their control.
Repossessing a BTL property
The repossession process is, in effect, two sets of legal action running concurrently. Firstly, the tenants have to be given notice under their assured shorthold tenancy agreement. If necessary, possession may need to be taken through the County Court. The timings for this can differ quite substantially depending on where you are in the UK. What we can say, is that the timing to start proceedings is increasing as the courts start to feel the impact of the general rise in possessions.
Very often the eviction of tenants is not a problem as the property is empty, hence the reason for the possession in the first place.
If the property is occupied then the tenant is entitled to attend court and to object to a possession order being given and, in cases of rent arrears or other breaches of the terms of the tenancy, the court may have discretion to allow the tenant to remain provided that the breaches are remedied. But, once the term of the tenancy has expired, the court must give the landlord possession if the correct notice procedure is followed.
LPA receiver
Ultimately, it may be necessary to appoint a receiver under the Law of Property Act 1925. It will then be the receiver’s job to obtain vacant possession and the sale of the property.
Adopting a collaborative approach
Legally, a lender cannot inform a broker that a client is in financial difficulty so it is incumbent for the broker to keep in regular contact. We believe early intervention reaps the best results and, more often than not, repossession can be avoided. Debt restructuring is normally freely available if the process is started early enough and we would advise the lender, broker and end client to work with us to ensure the best outcome for all. Despite popular misconception, this may well not be repossession.
