Fact check: Do lenders really oppose longer tenancies?
Published: 19 January 2017 | Author: Bernard Clarke
As market conditions have steadily improved in the aftermath of the financial crisis, lenders have continued to make funding more readily available for housing in all tenures. And, as part of this process, lenders have shown an increasing appetite to advance mortgages to landlords who want to offer longer tenancies to those renting in the private rented sector.
In a recent House of Commons debate on the homelessness reduction bill, it was mistakenly alleged that the CML had been a “stumbling block” to moves to offer longer tenancies. We are not opposed to longer tenancy agreements and, although it is for individual firms to determine their own lending policies, an increasing number of lenders are now willing to offer mortgages to landlords who want to provide extended tenancies.
The housing charity Shelter has acknowledged this. Last year, it published a blog pointing out that there is now a growing number of lenders who are willing to offer mortgages to landlords wanting to provide longer tenancies. And these mortgages are still available, even though we are forecasting a slowdown in the buy-to-let sector this year following the introduction of new stress-testing for lending to landlords and changes to tax relief for them.
In its blog, Shelter said that a “significant, silent shift” had been taking place in the buy-to-let market. “It’s one that both lenders and the government deserve some credit for,” the blog said, “and it should make it easier for tenants to ask for a longer-term tenancy.”
Alongside its article, Shelter published a “non-exhaustive list” of more than a dozen lenders who were prepared to advance mortgages to landlords who would like to offer longer tenancies. Lenders responsible for more than half of England’s buy-to-let loan book now allow landlords to offer contracts of at least 24 months, with most permitting up to three years, the charity said. Some had no maximum tenancy period at all.
Shelter concluded: “Any landlord that wants to offer a longer tenancy should now be in a position to find a lender that will let them. And any renter that wants one should be able to ask their landlord for one with the confidence that mortgage conditions aren’t going to be as barrier.”
Demand for longer tenancies
Over the last two decades, the number of households renting privately has more than doubled from 2.2 million (9% of the total housing stock) to 5.3 million (19%). And, alongside this growth, there has been a growing acknowledgement of the wishes of some of those renting privately to have greater security of tenure, with the option to sign up to longer agreements with their landlords.
A quarter of all families with children now live in a privately rented home, according to Shelter, and this has pushed the plight of tenants up the political agenda. In response, the government introduced reforms intended to make it easier to agree longer tenancies, and Labour stood in the last election on a manifesto pledge to introduce three-year tenancy agreements as standard within the private rented sector, after a six-month probation period.
Despite this, however, only a small proportion of landlords have reported significant demand from tenants for longer tenancies. And many of those living in private rented accommodation continue to opt for the flexibility provided by shorter tenancies, with many preferring the freedom to be able to move home at short notice.
Evolving lending policies
Some commentators believe that the historical tendency for lenders to offer mortgages to landlords providing six- or 12-month tenancies was a direct result of the introduction of the standard assured shorthold tenancy by the 1988 Housing Act. This legislation established a default tenancy of six or twelve months, although there was an option to make this longer if desired. But many landlords simply adopted the standard, un-amended six or 12-month tenancy agreement.
It is thought that this helped shaped lenders’ policies, with some firms writing in a tenancy of up to 12 months as part of their standard buy-to-let lending conditions. In 2014, however, the government published a new model tenancy agreement, which sought to remove some of the barriers to longer tenancies.
It did so by writing in provisions for rent reviews, and other measures allowing the landlord or tenant to end the agreement during the fixed term if their circumstances changed.
The political debate
Even though an increasing number of lenders began to allow longer tenancies as a result, outdated perceptions of lending practice have persisted. In the recent House of Commons debate on the homelessness reduction bill, one MP mistakenly said that “a tenancy of more than one year is not permissible in case the mortgage holder defaults and they need to sell the property as quickly as possible to recover their losses.”
We have written to MPs involved in the debate on the homelessness reduction bill to explain that many lenders now willingly advance mortgages to landlords who want to offer longer tenancies.
Our letter points out that, when a tenancy agreement comes to an end, the lender does not require a landlord to change their tenant. Many landlords simply continue to rent to the existing tenant, and there is no limit to how long this may continue. So, lenders’ terms do not preclude tenants from occupying a rental property for many years in practice, if both landlord and tenant are happy with the arrangement.
Providing security for tenants – even when the landlord is unreliable
Lenders have a range of options for dealing with cases in which the tenant is continuing to pay their rent, even though the landlord is not paying the mortgage. This is reinforced in our guidance on buy-to-let arrears and possessions, which says lenders should take into account the position of the tenant occupying the property, as well as the landlord who has taken out the mortgage.
The guidance says that advancing a buy-to-let mortgage implies consent for a tenancy in principle. If a lender therefore wishes to seek possession of the property, they must do so within the terms of the tenancy. And, if lenders want vacant possession of the property, they must seek it in accordance with legislation governing the tenancy.
In some cases, a lender may opt for the alternative of appointing a “receiver of rent,” to whom the tenant can continue to make payments instead of paying the landlord. If the rent paid covers the mortgage commitments, it is possible for this arrangement to remain in place and for the tenant to continue to occupy the property. The receiver of rent adopts the role of the landlord and manages the property and the relationship with the tenant.
Our survey findings
Our letter to MPs reminded them that landlords were continuing to adapt their policies in support of longer tenancies, even though take-up by tenants remains fairly weak.
In our recent research report, The profile of UK private landlords, we published survey findings showing that more than a third of landlords are now prepared to offer leases of more than 12 months on at least some of their properties (see Table 1). It was not possible, however, to work out from the survey how many tenants were taking up the offer.
Table 1: Landlords offering leases of longer than 12 months on any units, buy-to-let and non buy-to-let
|Would offer but there is no demand||17%||21%||14%|
|Do not offer even though there is demand||14%||13%||14%|
|Do not offer and there is no demand||22%||24%||22%|
The survey found that landlords without mortgages were a little more likely to offer longer tenancies than those whose properties were funded with a buy-to-let loan. Among those not offering longer leases, most landlords said there was no demand for them.
The report also pointed out that almost half of landlords use agents to find their tenants, and that it may be in the interest of agents to encourage shorter leases with more frequent renewals. It is possible that landlords’ perceptions of whether longer leases are offered – and of tenant demand for them – may be affected by the way some lettings agents operate.
The assertion that lenders are a barrier to longer tenancies is a myth. While it is for individual firms to determine their lending policies, our own survey and the list of lenders published by Shelter show that there is a significant number of lenders that are prepared to advance mortgages to landlords who want to offer tenancies for two or three years – or even longer.