Landlord Repossession Worries
Landlord – repossession worries
Landlords have been hit by several worrying headlines in the media over the last week. The first headline concerns repossession of buy-to-let properties and the other relates to the increasing problem of negative equity amongst buy-to-let property.
Where do professional landlords go for their buy-to-let insurance?
We decided to investigate these and confront the issues of landlord repossession head on.
Firstly, the report that buy-to-let mortgage could be repossessed without the mortgage lender going to court rang alarm bells with many landlords who are struggling with their buy-to-let mortgage payments. The headline grabbing case which incorrectly reported it as a buy-to-let mortgage was in fact involving an owner occupying couple.
The importance of this case was that it reaffirmed the rights and responsibilities of a mortgage lender and borrower, despite the recent arrival of the Human Rights Act. This is that a mortgagor runs the risk if they do not keep up their repayments of having their property repossessed.
The judgement in itself did not change anything. Landlords should be clear that if they don’t keep up to date with their mortgage payments the lender does not have to get a court order to repossess the property, the court order just enables the mortgagee to ensure that they gain vacant possession. What landlords should remember is that buy-to-let lenders are not in the business of being landlords and would much rather leave landlords to continue to own their property whilst they get on with their jobs of being a bank or lender.
The CML guidance on buy-to-let arrears & repossessions.
The Council of Mortgage Lenders (CML) which represents 97% of all mortgage lenders has published A Statement of Practice setting out how to handle arrears and possessions. It suggests that its’ members should take a flexible approach when dealing with borrowers with difficulties. It indicates that measures that can be taken to help them are:
a) Extending the term of the buy-to-let mortgage – this in most cases will not make a significant difference to the borrowers monthly payment
b) Change the type of BTL mortgage – for instance to an interest only one where payments are less
c) Defer payment – in this situation payment can be deferred or reduced
d) Capitalise interest – this is linked to action c) and where arrears have built up but full monthly payment have been restarted
Falling house prices & negative equity
Landlords who have read the headlines this week could not have failed to notice the recent report by Standard and Poor.
Standard and Poor the credit rating agency painted a gloomy picture for landlords. In it’s analysis of 200,000 buy-to-let mortgages about 20% of the total, it concluded that
"We also estimate that around 20%-40% of buy-to-let borrowers could fall into negative equity by mid-2009, based on a peak-to-trough house price decline of around 25%-30%,"
Handing back the keys
Landlords should be aware that should they ignore the arrears problem and just let the mortgage company repossess a landlord’s residential investment property; this will not be the end of a landlord’s debt problems. The process of repossession involves the mortgage company taking ownership of the investment property and then selling it. They may do this at a property auction or through an estate agent.
After a buy-to-let mortgage lender takes a residential investment property into possession, interest will generally continue to be charged on the buy-to-let mortgage until the residential investment property is sold. There will also be other charges made to the buy-to-let mortgage account, including estate agents’ fees for selling the investment property and legal costs.
The mortgage lender has a legal duty to sell the investment property for the best price that can reasonably be obtained. Landlords should note that the timing of the sale and the fact that it is a repossession property can mean that this is seriously below what the landlord considered their investment property to be worth. If a sale results in a surplus after all the money owed to the buy-to-let lender and any other secured lender has been repaid, then this is returned to the landlord. However, if the sale proceeds are insufficient to pay off the money owing to the buy-to-let mortgage lender, the landlord faces a "shortfall debt", which they still owe to the buy-to-let lender even after possession.
What will the BTL mortgage lender do if there is a shortfall debt?
The action taken by the buy-to-let mortgage lender will depend on the circumstances. Usually, the buy-to-let lender will contact the borrower as soon as possible after the sale of the residential investment property and give them a final financial statement. This will show the level of debt still owing to the BTL mortgage lender. If there is a shortfall of debt, the buy-to-let mortgage lender may:
Immediately discuss proposals with the landlord on how they might repay the debt; or
Try to give the landlord some time to get back on their feet financially before contacting them about repaying the debt.
How long after the repossession can lenders seek the recovery of the debt?
In England, Wales and Northern Ireland, a buy-to-let lender legally has 12 years in which to contact the borrower to begin the process of obtaining repayment of shortfall debt; this period is usually restricted to 5 years in Scotland.
Where a forwarding address is known, most buy-to-let mortgage lenders will contact the landlord just after possession with a view to agreeing a manageable arrangement for repaying all or some of the debt.
Silver lining for landlords
The silver lining for landlords is that unlike commercial property a mortgage lender does not require a minimum Loan to Value (LTV) throughout the period of the buy-to-let loan. This allows a landlord to trade their way out of the situation by making over payments or waiting for property values to recover.
Advice to landlords
Landlords should therefore resist throwing in the towel and taking a big financial hit. If they do get into temporary financial difficulties then it best to contact their mortgage lender early on to attempt to negotiate revised payment terms whilst they get over their temporary financial difficulties.
The worst approach is to ignore the situation and hope the problem goes away. Landlords need to take control and if necessary take further advice