LANDLORDS FACE CREDIT CRUNCH
Many landlords have been watching the latest shenanigans on the world’s stock markets with bemusement and a certain amount of relief.
Whilst the FTSE 100 is now down over 10% in the last month the UK housing market seems to be quietly ticking upwards. Rightmove has just revealed that average house price inflation in England and Wales grew to 12.8% in August, up from 10.3% in early July.
So is there anything for landlords to worry about?
Sub-prime – what’s it all about?
The media has been reporting for some time that there are problems in the US housing market. This all stems from lending to individuals with low credit scores. The slump in the US housing market combined with rising interest rates has meant many of these borrowers are throwing in the towel and defaulting on their loans.
The problem for the world’s financial system with these loans is that many have been packaged up with less risky loans and sold or syndicated to other financial institutions. These institutions then use these assets as security to enable them to loan to somebody else. The analogy that Merry Somerset Webb editor of Moneyweek uses is that of an ‘off’ sausage. If eaten it would make one person very ill. However, what the financial ‘wizz kids’ have been doing is chopping this sausage up and putting it into lots of other sausages to make it more palatable. The result is that rather making one person very ill everybody potentially could end up a little bit poorly.
So how does this affect me as a landlord?
Thin end of the wedge
Unfortunately, the sub prime debacle is the thin end of the wedge. The booming world economy, stock markets, asset price inflation have all meant that lenders have been getting more and more lax in their lending criteria. The sub prime phenomenon in the US is a high profile manifestation of what has been happening in credit markets across the world. This includes lending on buy-to-let property.
It may come as a surprise but banks actually like lending money to landlords.
They make lots of money initially by writing mortgages and charging landlords up front fees and then subsequently through the margin on the interest they charge i.e. the difference between the costs of the money they borrow and the interest rate they charge the landlord.
Banks therefore want to lend as much as possible to as many landlords as they can. The crunch comes, when landlords or borrowers default on their loans and when as was the case in the early 90’s the amount the mortgage companies lent was more than the value of the property –the so called negative equity. This is the bit that is painful and the bit that tempers banks urge to lend.
How do I get access to buy-to-let insurance used by professional investors?
The looming credit crunch
Many lenders are able to balance their risk profile by writing a mortgage and taking a profit but then not holding on to them. What they do is package up many buy-to-let mortgages and then sell them on to financial institutions such as hedge funds in a process called syndication. This means they are not left ‘holding the baby’ should the borrower default. As long as the banks can do this the incentive is to get involved with riskier and riskier products, making a profit and then selling the risk on to somebody else.
All this is fine and dandy until the hedge funds and other financial institutions that have being buying these syndicated loans get scared and don’t want to buy them anymore because they start getting worried about the risk they are taking. Mortgage lenders are then left holding too many risky mortgages and they ‘ain’t happy’.
This is when the buy-to-let credit crunch hits. Mortgage companies start to cut back on their more risky products such as high loan to value buy-to-let mortgages or low rental cover buy-to-let mortgages because no longer can they flog them on to somebody else. So what do I do as a landlord?
For most landlords, the answer is just to sit tight. The impending credit crunch will have little short term impact. A landlord’s loan payments remain the same and as long as they have a tenant there is no need to panic. In fact, if anything the chances of another interest rate rise this year has somewhat reduced.
However, for those landlords that are thinking of remortgaging, especially if you are after a high loan to value or have low rental coverage the message is clear. Do it now! The banks and mortgage companies look to review their products every month and they will all be looking at ways that they can reduce their risk in light of a more restrictive credit market. This means cutting the numbers of riskier buy-to-let mortgage products and demanding a higher premium for them, making it more expensive for landlords.