Specialist lender Paragon has warned that buy-to-let borrowers could face critical financial problems if interest rates rise.
Currently, lenders assess a buy-to-let loan based on whether rental income will cover mortgage interest payments by at least 125%.
However, John Heron, managing director of Paragon Mortgages, said that many lenders are only looking at current mortgage interest rates, at an assumed 5%, and not taking into account possible rises.
The warning echoes that of Paul Fisher, the Bank of England’s executive director of markets, who said last month that a ‘normalised’ bank rate of 5% would one day return, and that this needed to be in people’s mindsets.
John Heron, MD of Paragon Mortgages, said: “There are more lenders finding their way into the amateur end of the buy-to-let market, attracted by the strong credit quality and high margins.
“Some of these lenders have little or no experience in buy-to-let and are simply delivering ‘me-too’ criteria. On affordability assessment, this often means asking that the rent exceeds the interest-only mortgage payment by a given percentage on an assumed interest rate.”
If Bank of England base rates move up to 5%, charging rates on most current buy-to-let mortgages will be around 8% or 9%, leaving a number of borrowers unable to cover their mortgage payments with rent income. .
Heron said some lenders are currently not even assuming interest rates on buy-to-let mortgages are as high as 5%, but as low as 3%.
Heron warned: “With an affordability test at these levels, a loan will be fundamentally unaffordable once rates move much beyond their current levels, never mind once they hit 5% or more.
“This is an area that warrants prudence and caution, and not competition as some lenders would appear to think.”
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Comments
There are so little we could do when things get complicated. By the way, we can help if you're facing debt problems, arrears, repossessions, probate worries, have become an accidental landlord or you need a way to break out of a chain.
I agree with Chris. So long as property prices continue to rise, buyers should be alright for the next while. Ultimately, we have already had a major correction recently - how likely is there to be another one so soon after? I would think it rather low.
-Harold
Chris - Would you just happen to be a fifty something baby-boomer?! i.e. the lucky generation!
(BTL has decimated the first time buyer market and labours great pension idea has failed miserably. the maths could never work out could it? how could we ALL be BTL investors?)
Why do people keep saying that? BTL property sales have only ever accounted for 8% of low value stock sales, ie. the first time buyer properties! Sure, some first time buyers have missed out against BTL investors, but in my experience, first time buyers have been gazumping each other most of the time.
As for the pension plans, sure if I knew that I would be taken care of on a state pension, I wouldn't bother, but as things stand, I would have to work until I am 75 or even 80-years old by the time I would get one and then even when this happens, I would be living in one room of my house as I couldn't afford to heat the other rooms! That's not a retirement I want to look forward to! Basically, there are few other options available.
Why buy gold and other stocks? They don't give you any money each month while your holding them! A property can return hundreds or even thousands or pounds per month and you still have the chance of equity growth if the prices rise.
Not everyone can buy multiple rental properties these days and this is unfortunate for those that can't. It was an opportunity open to those people that got onto the housing ladder before the late 90's, but hey, lifes like that sometimes. We live in a free society and people need to invest in opportunities when they are presented to them. Right time & place etc. I am sure I have missed out on other opportunities in my life, so don't feel guilty about buying some BTL properties, to protect my future and that of my family and there is no point being bitter about it if you or anyone else missed the boat.
BTL investors do actually provide housing accommodation to thousands of people that can't afford to buy and have no alternative, but please don't blame the BTL investor for depriving that tenant from buying themselves because of house prices. It wasn't the BTL investors that pushed prices up, it was the banks with cheap credit and a huge number of buyers chasing a small number of properties!
We should know how to be protected at all times. Time is of the essence when dealing with UK properties in our current market. Often a foreclosure property will sell in a matter of days so it is necessary to provide the information the seller is requiring very quickly.
i should add that alot of people think that the rise of CGT to 28% by the coalition is just a resting point on it's way back to 40%, thereby reversing the labour policy.
BTL has decimated the first time buyer market and labours great pension idea has failed miserably. the maths could never work out could it? how could we ALL be BTL investors?
big BTL portfolio? sell the rubbish now and sit on the stock that washes it's face properly....
oh this is all going to go so wrong. why is it that people just cannot understand that todays interest rates are temporary, the lowest for 300 years. and very soon they be edged up and the longer the BOE waits the quicker and higher thye'll have to go. so many people have been suckered into this bull-trap and it's tragic.....
If the rules are that the rent only has to cover the mortgage interest (on an Interest Only mortgage) then the deal never becomes more stable
That is why it is important to pay down the loan each year if a landlord has the opportunity.
As long as rent prices and/ or house prices continue to rise, the stability of the investment will continue to strengthen over time.
If interest rates rise pushing up existing BTL mortgages, this would happen across the board and overnight, landlords would be forced to push up rents to cover the rise. Tenants would be hit first.
Rental prices fell when interest rates fell, so when they rise, the opposite will happen. Sure some tenants would find somewhere cheaper and some landlords would struggle, but the BTL industry is stronger than many people think. Long term equity growth is what landlords should be aiming for and as less people can afford to buy, the growth in tenant numbers will keep BTL on the map.
Ironically, the worse thing for landlords is a boyant housing market where everyone wants to buy and no one wants to rent, but when that happens, house prices are normally going through the roof and the landlord can make some serious equity increases as long as he can get some rent in to cover all or part of his costs.
I have been into BTL since 1991, have kept my loan to value down below 70% and have fixed my loans for many years to minimise risk. Each year I clear 10% of the mortgage on each property and one day my 4-BTL properties will be paid off and will provide me with a pension!
I don't care what the property values are, as long as the rental income exceeds the mortgages!
I've seen a higher number of ametur landlords come in to the office in the last to days to get their property valued for potential sale, perhaps the BTL craze is about to crash head first into the dirt !!!
If the rules are that the rent only has to cover the mortgage interest (on an Interest Only mortgage) then the deal never becomes more stable.
We saw large drops in the MLR presumeably we could see significant rises .... and then a BTL train crash.