Buy-to-let lending in the fourth quarter of 2008

New lending for buy-to-let continued to decline in the fourth quarter of 2008. There were 37,000 new loans, worth £3.9 billion - 12% down (19% by value) on the third quarter, and 56% down (65% by value) compared with the fourth quarter of 2007. The CML only began collecting quarterly buy to let data in 2006, but on the basis of previous half-yearly data this is almost certainly the lowest quarterly lending figure since 2003. 

Outstanding buy to let mortgages represented around 10% of all loans, and around 11% of the value of all lending, at the end of 2008.

Over 2008 as a whole, buy-to-let lending accounted for 10.6% of the value of total gross mortgage advances, down from 12.3% in 2007.

Many buy-to-let borrowers will now be benefiting from significantly lower mortgage costs than when they first took out their loan. With tenant demand remaining strong in most areas, many landlords will therefore be experiencing an improvement in their net income.

However, at the end of 2008, 2.32% of buy-to-let mortgages were over 3 months in arrears (without a receiver of rent in place), while a further 0.23% were over 3 months in arrears with a receiver of rent in place. The comparable arrears rate for the wider market (including buy to let) was 1.88%. There are several factors likely to have influenced this arrears rate, including:

• Interest-only mortgages - in contrast to owner-occupiers, most buy-to-let lending is interest-only, and in a falling interest rate environment this type of borrowing shows up as a greater number of months in arrears than equivalent capital-repayment borrowing;
• Fraud - some buy-to-let fraud involved over-valuation to achieve a larger loan than the sale price of the property, with no rent or mortgage ever being paid;
• Payment problems on the part of landlords - landlords are not immune from wider economic problems, and some are diverting the rental income received from tenants to servicing other commitments (perhaps their own owner-occupier mortgage) instead of paying their buy-to-let mortgage; and
• Voids - there is an over-supply of rental property in some locations, so some landlords will not be receiving a rental income on empty properties in current market conditions, and may be unable to pay their mortgage as a result.

In terms of repossessions, 0.11% of buy-to-let mortgages were taken into possession in the fourth quarter of 2008. This repossession rate is broadly in line with the wider market, although it is difficult to compare the two markets on a like-for-like basis, because appointing a "receiver of rent" is only possible in the buy-to-let market, and in some ways is similar to repossession.

In absolute terms, the number of buy-to-let mortgages in arrears, in possession, or with a receiver of rent in place, is not large. And in most cases, the tenants of buy-to-let landlords who fall into arrears are able to continue to live in the property with sufficient notice to find alternative accommodation even if a lender does decide to sell. Buy-to-let lenders respect bona-fide tenancy agreements.

However, the position of tenants is obviously a matter of concern if they are paying rent, but their landlords are defaulting on the mortgage. This is not primarily a buy-to-let problem; it is a greater problem where the landlord has taken out the mortgage as a home-owner, but then failed to seek permission from their lender to let out the property.

From 6 April all tenants will receive increased notice of any court hearing for mortgage possession (around 5-7 weeks). Tenants need to open any correspondence addressed to "the occupier", as this is how they will receive notice of any action a lender might be taking against the borrower/landlord. Lenders send such a notice to all mortgaged properties where they are taking a possession claim to court, whether the mortgage is a buy-to-let mortgage or not. This means even tenants whose landlords have failed to inform their lender that they are renting out their property (which is always a contractual requirement of any mortgage) receive notice of any court action.