Thursday, Oct 18, 2007
Rising loan to values could trigger BTL panic selling
MoneyWeek: Could this be the ruin of the buy-to-letters?
One thing all buy to let investors must remember is this: property can turn nasty fast. And when it does, there's one little covenant in their mortgage agreement that could prompt panic selling...
Posted by mary @ 11:13 AM (1139 views) Add Comment
17 Comments
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1. sold 2 rent 1 said...
The answer is:
"The loans allow lenders to periodically revalue properties (at the borrowers expense naturally). If the value has fallen and the loan to value ratio has, as a result, risen above the level required by the mortgage (say from 80% to 85%) the lender can then ask the borrower to come up with more cash to get it back down. The result, says my lawyer friend, will be that as capital values drop, buy-to-let investors will start to receive letters from the lenders along the lines of "Dear Mr Bloggs, I should be grateful if you would restore your loan to value ratio by sending us a cheque for £25,000". "
2. cornishman said...
This is absolutely brilliant. It's got to be publicised as much as possible - spread the word. It will put the sh*ts up the B2L brigade big time.
3. voiceofreason said...
cornishman - very eloquently put :-)
4. converted lurker said...
sorry to go against the flow but I thought that was a truly shite piece of journalism by MSM. Panic stirring for a minority audience is quite frankly silly and adds nothing to the debate. Should lenders follow this route they'd find keys delivered back to them en masse and they'll do anything to prevent mass repossessions.
5. uncle tom said...
I doubt the lenders will write such letters as a matter of course - but when they reckon a borrower is heading into default it will probably make the repo' process quicker and easier for them - demand more money - borrower can't pay - breach of contract - keys please!
6. cornishman said...
@converted lurker
if no-one wants to upset the apple cart, why is there unprecedented evidence of banks pulling out of mortgage offers between exchange and completion - if they can find a technicality to do so? The banks will look after themselves first in any way they can. If that means making sure that there is still equity in their collateral, and they have the contracts to do so, I reckon they will insist. Their shareholders will insist.
7. dohousescrashinthewoods said...
Wow, this is special indeed.
A new BTL with 10 250K flats at 85% owes 2125K
If they drop to 180K (as has been seen already) then maximum LTV is 1530K
That's a "margin call" of 595K.
8. converted lurker said...
cornishman just think about Merryn's suggestion and the implications it could/would have. They could not possibly push on those margin calls to the BTL investor. Mortgage contracts are full of nasty details just as bank o/ds are too. However, the banks want careful slowdown/stagnation/bury heads in sand as nasty problems go away for a decade or so as a route forward, not financial armaggedon. Refusing a loan or reneging on an offer is prudent IMHO, particularry for the BTL industry - which has lost 75% of its mortgage product over the past few weeks. Banks will want these mortgagees to stay in it for the long term. Dafaults en masse will kill 'em quicker, they've already pencilled in a long slow death.
9. captain sensible said...
converted lurker. It's all about sentiment, the fact that it could happen will be enough to scare quite a few BTLrs. I also find it a nice form of payback. Other than pushing up prices, one of my main concerns about BTLrs hoarding property is that the landlord favouring laws in the UK mean that tenants live six months at a time, knowing that they can then be easily evicted. Even if the landlord is benign in practise, the threat is ever present. Home owners who can afford their mortgage payments feel more secure, knowing that they can't be evicted unless they default. This clause give BTLrs a taste of the ever-present uncertainty faced by their tenants.
10. Flapjack said...
This scary stuff and its not even Halloween! First I've heard of this - how many BTLers are also ignorant of it. This fact changes the whole risk profile of property investing. The BTL mortgage lenders should show a compulsory risk waring - as they have to for share dealing - 'The value of your investment can go up or down' type statement.
11. cornishman said...
converted lurker - I see what you are saying. If one sees the bigger picture, what you suggest is obviously the sensible way forward. keep confidence up. I just think it's quite possible that each bank will try to look after itself before all the others do...
12. converted lurker said...
captain don't get me wrong, it was a juicy piece of scaremongering by Merryn, I'll leave the rest of you to suggest she's a naughty girl who could do with a good spank...oh 'ang on, is that just me? ;¬) I just reckon it's not as good as her usual stuff. Estimates put one in twenty properties as currently being for sale in the UK, I reckon we're fast approaching a situation were the estate agent industry cannot cope with the volume of property up for sale with no-one buying. The market is unravelling quicker than I thought now the blue touch paper has been lit. Banks will protect themselves but they know filling up the repo courts and auction halls just leads to more cost.
13. Bertywooster said...
Feels like 1992 all over again. Forget the auctions just approach the lender directly for their repossession list and take your pick.
14. cyril said...
While the lenders act in a cartel, nobody will upset the applecart. Also there is little point in sending demands to people who are technically bankrupt already. But the banks have already tightened up on their lending criteria, and so this seems like a logical next step. Also no one will shed any tears if a BTL 'millionaire' goes bust so it won't hurt the bank's reputation much.
15. cornishman said...
- some clever dick in a bank will come up with the wheeze that since all the other banks will think like CL suggests, their particular bank could protect itself without making any difference to the overall picture. But what if they all come up with the same cunning plan at the same time...?
16. Wdbeast said...
The reason that the clause was put in in the first place by the banks is to ensure they can force a sale whilst there is still sufficient equity for them to get there money back.
The fact is that the banks are over exposed to property and they will have no issue calling in their debts to reduce their exposure as soon as they see the HPC has started....
Watch this space
17. Orwell said...
Mmmmmmmmmmmmmm bad news for BTLrs, good news for me as a lawyer... picking over the bones of misfortune...
P4C what did you train for?