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Dt: Risky Buy-To-Let Lending On The Up

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Risky buy-to-let lending on the up

Buy-to-let mortgages are twice as likely to turn bad as loans taken out by owner-occupiers, the Bank of England said, warning that landlords could be a threat to banks and wider financial stability.

The rental sector is booming as rising house prices make it harder for would-be first time buyers to get onto the property ladder, and banks typically have tighter standards on home loans for owner-occupiers than for buy-to-let borrowers which makes it easier for landlords to get a mortgage.

Buy-to-let mortgage lending has jumped 40pc since 2008, while the stock of lending to owner-occupiers has risen just 2pc over the same time period.

But officials on the Financial Policy Committee, which is chaired by Bank governor Mark Carney, fear that landlords may be more vulnerable to a slowdown in the market, a fall in house prices or a rise in interest rates than borrowers who buy a property to live in.

That could lead to losses on the loans or to a sharp downturn in prices as buy-to-let owners scramble to sell up.

“Since 2010, rates of credit loss on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers,” said the minutes of the FPC’s latest quarterly meeting.

“Assessed against relevant affordability metrics, buy-to-let borrowers appeared more vulnerable to an unexpected rise in interest rates or a fall in income.”

With buyers piling into the market, taking on greater levels of debt to benefit from rising house prices and low interest rates, this could pose a risk to financial stability.

“Increased competition among lenders in the buy-to-let sector had not to date led to a widespread deterioration in underwriting standards of UK banks. But some smaller lenders had loosened their lending policies, for example by raising their maximum loan-to-value thresholds,” said the FPC.

“The Committee noted that new loans to buy-to-let investors were often subject to less stringent affordability tests than loans to owner-occupiers.”

The FPC wants powers to restrict buy-to-let lending in the same way it has with other mortgages, placing restrictions on the maximum size of loans for a given income or a given house price.

The Treasury is consulting on the idea of giving these powers to the Bank of England.

"Ahead of these powers being finalised, the FPC stood ready to take action if necessary to protect and enhance financial stability, using its powers of recommendation," the minutes said.

Another option would be to force banks to hold more capital to slow down a boom, although this is more controversial.

There were some signs of a divide on the FPC over the use of the so-called 'countercyclical capital buffer' to control bank lending.

The buffer forces banks to hold more capital against their entire loan book, reducing the amount they can afford to lend and making sure they have bigger cash reserves in place should the economy stumble.

The FPC decided to keep the buffer at zero, but some members did argue that it will “soon” be time to increase the requirement, potentially meaning a rise is on the cards for March 2016.

The Chancellor is hiking stamp duty on second homes and investment properties in a bid to clamp down on buy-to-let lending and counter the housing shortage in the country. The FPC said it is “closely following” the market to study the impact this policy will have on prices and transactions.

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“Since 2010, rates of credit loss on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers,” said the minutes of the FPC’s latest quarterly meeting.

If this is true was there any action since 2010 to stop it? Also, What could have gone wrong with BTL?

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“Since 2010, rates of credit loss on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers,” said the minutes of the FPC’s latest quarterly meeting.

If this is true was there any action since 2010 to stop it? Also, What could have gone wrong with BTL?

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(h/t Neverwhere)

If I was guessing I'd say that before the crash rampant HPI meant that once a loan soured the bank could extend and pretend whilst the borrower sold up. Post-2008 this option is trickier. From 2008 to 2012 falling rates and moving repayment to interest-only in the owner-occupier sector papers over a lot of cracks. In the BTL sector the banks call in the loan at the first sniff of trouble. Post 2012, owner occupier lending is tighter and the borrowers are stronger. However BTL is still for idiots, hence more unfortunate accidents.

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Rents not covering repayments. But it's a one way bet!

This is probably also important too. As the number of BTL mugs ramps up they drive down their so-called 'gross yields' and 'net yields'. Many late entrant BTL investments probably lose money month to month on the cash flow. They assume a capital gain will make up for the mounting losses on the rents vs operating expenses side make it all worthwhile.

Edited by Bland Unsight

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This is probably also important too. As the number of BTL mugs ramps up they drive down their so-called 'gross yields' and 'net yields'. Many late entrant BTL investments probably lose money month to month on the cash flow. They assume a capital gain will make up for the mounting losses on the rents vs operating expenses side make it all worthwhile.

Some will even say it's all about capital growth and how they don't mind using their wages because of HPI forever.

Makes you wonder what they'd do if IRs went up to normal levels, more salary was being used to cover BTL mortgage and when they'd be better off stuffing all the money they spunked away on the property in a savings account.

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This is probably also important too. As the number of BTL mugs ramps up they drive down their so-called 'gross yields' and 'net yields'. Many late entrant BTL investments probably lose money month to month on the cash flow. They assume a capital gain will make up for the mounting losses on the rents vs operating expenses side make it all worthwhile.

Let them dance in. Dance in BTLers. You had it all.

Sorry; I just feel like cheering myself up, along with other hpcers. 3 of Blandy's posts I've just pulled from one of my hpc folders; not got the dates but fairly sure they were all pre July Budget.

What makes your landlord hand weak is that if buy-to-let mortgage rates move up sharply and a recession hits and you find that you can’t secure the rents that you’d anticipated, the net cash flows on your property can turn negative. Now your work as a contractor generates income, but sometimes bad things happen.

You might find your contracting services are no longer required. The recession makes it difficult for you to get work and your buy-to-let investments, as well as sundry expenses like tissues and hand lotion, are bleeding your savings. A point would come where you might want to sell the BTLs so you could get out ahead. However, you’d find that a house price crash meant that if you sold the BTL you’d make a capital loss, (that is of course what the deposit is really for, to ensure that you and not the bank absorb the capital loss).

Hence you’d be looking at a situation where you thought the market was irrational (your BTL, in your estimation, was worth 400k, although nobody would pay you 400k for it) but the rate at which the negative cash flows and your own living expenses were bleeding out your liquid assets meant that you couldn’t hold out forever because eventually you’d run out of savings to pay the mortgages on the BTLs; you would no longer be able to meet your obligations as they fell due, i.e. you would be insolvent, but sometimes the market can stay irrational longer than you can stay solvent. That is the heart of the aphorism; it’s about holding on to a leveraged investment position when the market turns against you.

Late entrants are piss weak because in reality the gross yields people are signing up for are too thin to absorb much movement on rents or BTL mortgage rates, much less disadvantageous movements of both at the same time.

You’ve got it all back to front. The bank demands the big deposit because they know that you are weak. Arguing that you are not weak because you’ve handed over a big deposit is an interesting way to look at things, but in my opinion, completely wrong headed.

Few FTBs can raise large deposit. BTLers-'obsession'-'core-voters' have been able to pull down more 'easy' money for the deposit, to farm generation-rent-forever-population-growth. Then the banks got them on deposit, and knives positioned to look at their main homes if they struggle with repayments. And wider banking system can have its fill writing new mortgages on both main home and BTL in the HPC.

You exaggerate the consequences for renters. It is a pain in the @rse having to move, but it is not, “losing the roof” over your head, it is changing the roof. I’ve been booted out by landlords who were selling up. On one occasion I moved somewhere much cheaper, and on another occasion I moved to somewhere larger and more expensive, (because local rents appeared to have softened between 2007 and 2012 and thus the larger stuff looked like better value :) ).

Likewise, I think that you exaggerate the pain for BTLers. They take a punt; maybe they win, maybe they lose. If they are taking that punt because they don’t see any other investment that will give them the capital gains and investment income that they need to make up for the fact that they don’t have a pension, then the heart of their problem is not BTL, it’s the fact that they haven’t made adequate provision for a retirement income. If they took the what savings they did have and put it all on a horse, we wouldn’t (well, I wouldn’t) be here posting “Oh, the poor devils, the terrible pain!”, I’d just think that it was unfortunate that a fool had made their poor position worse by being foolish. The fact that ‘retail investors’ believe that there is a difference between leveraging up what little you do have and taking a punt on UK property in 2014 and betting on horses is bizarre to me, especially as we must have a sizeable cohort of 2007/2008 BTLers who got into the wrong markets at the wrong time and had their financial faces ripped off.

Finally, look at the risk reward profile for renters. Let’s say rates rise enough to make prices fall. Maybe during that correction they have to move, maybe they get screwed for an extra tenner a week in order to avoid moving. It’s not the end of the world. But maybe they gain the opportunity to buy at prices discounted by somewhere between 25%-40%. It won’t make a poor man rich, but the truth for me is that I presently regard part of my rent expense as the price that I pay for having somebody else take the balance sheet risk with an illiquid frothy asset that I would rather pay them to take than take myself.

Sometimes it's greed also; there are BTLers who want the world. More than enough but wanted more and moar and moar.

Also you're totally missing the point. The thread title is falling rents. fru-gal's anecdotal is consistent with falling rents, because the rental achieved recently is lower than the rental achieved earlier.

However, we can add to the anecdotal because one way to square the circle is to propose that the BTLer took all that time because they couldn't at first accept that they were going to have to accept a lower rent in order for the market to clear. Basically, the market stayed irrational* longer than they could stay solvent, so eventually they folded and let at a lower price. Now that suggests that some BTLers are simply unable to believe that rents fall, and you are giving the appearance of being additional anecdotal evidence to that end.

It also suggests two tricky questions for BTLers. How long do you keep a property void in order to wait for a pinch point in the mismatch between supply and demand to allow you to lock in the rent you want, and how many times does 'bad luck' on this score result in BTLers wiping out all their profits? On thin margins even a single month void is bad news. The take home message suggests a wise BTLer with any sense wouldn't hold the property void for too long. If that meant pulling the rent down sharply then plenty of BTLers will do just that, with the earlier entrants able to pull further down without turning cash flows negative. In the teeth of the next recession with all these piss weak late entrant BTLers desperate to avoid voids, rents could fall quite sharply. Sweet. Again, combine that with the end of FLS, BCBS RWA revisions and housing element of UC being trimmed and some late entrant BTLers are going to find that a 5% gross yield was just a ticket to an enormous capital loss on an investment with a negative carry. Double sweet.

* Irrational according to the BTLer, natch.

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Buy-to-let mortgage lending has jumped 40pc since 2008, while the stock of lending to owner-occupiers has risen just 2pc over the same time period.

But officials on the Financial Policy Committee, which is chaired by Bank governor Mark Carney, fear that landlords may be more vulnerable to a slowdown in the market, a fall in house prices or a rise in interest rates than borrowers who buy a property to live in.

That could lead to losses on the loans or to a sharp downturn in prices as buy-to-let owners scramble to sell up.

Jo public mind set preparation for the looming crash or crash in making? In the event of a crash, banks get juicy BTL deposits and lend against the same property to a future FTB. Can't see a more profitable business, Heads I win tails to you loose.

Edited by Fairyland

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Osborne in new blitz on buy-to-let lending

Bank of England to be given power to curb risky schemes as landlord loans soar towards pre-crisis highs. GEORGE OSBORNE will pave the way for tough new measures to curb the buy-to-let boom this week, amid signs the market is reaching dangerous levels. The chancellor will launch a consultation on handing the Bank of England wide-ranging powers to crack down on risky lending to landlords.

Edited by rollover

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Soon to be a loan.

Post found on a BTLer forum (dated yesterday).

I've got to admit I was not fully up-to speed with the SMI the changes. Thought it was just loan from 2018, but a bit more to it.

Claim time going back to "pre-protect the HPI 2008" times.... which HPCers had factored in, and some caution owners had put money aside for, or perhaps taken private insurance for (job loss ).

Support for Mortgage Interest

SMI, the payment which assists out of work households with the cost of mortgage interest payments on certain loans and which has recently been reduced, will be converted into a loan. Loans will be repaid on the sale of the property or when claimants return to work. This new system will apply from April 2018. The waiting period for SMI is currently 13 weeks. From April 2016 this waiting period will return to its pre-recession level of 39 weeks, meaning homeowners will need to be in receipt of qualifying benefits for 9 months before they will get any assistance with their housing costs.

– See more at: http://housingrights.org.uk/news/housing-announcements-2015-budget#sthash.unG1wvBl.dpuf

It now appears going forward its loans for everything which have to be paid back.

If people have lots of loan repayments how are they going to pass for a mortgage?

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If people have lots of loan repayments how are they going to pass for a mortgage?

This would be a valid query in regards to student loans and the like (in which case house prices will just have to come down to a point where mortgages are affordable despite other loan repayments) but it's a bit weird in relation to SMI loans, given that by definition they are only available to people who already have mortgages.

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