STRUGGLING WITH MY PAYMENTS
The latest figures from the Council of Mortgage Lenders (CML) reveals that there has been a sharp rise in arrears and repossessions amongst buy-to-let landlords as the ‘credit crunch’ bites. Landlords that are more than 3 months in arrears have gone up from 0.58% of loans at the end of 06 to 0.73% by the end of 2007. An increase of over 25%.
There are obviously a lot more landlords that are behind with there payments but do not register on the Council of Mortgage Lenders (CML) figures.
How do I make sure my property is fully insured?
It is a sad fact of life that landlords that are highly indebted and then face an extended void period often find themselves in arrears with their buy-to-let mortgage payments. In these circumstances the worst thing a landlord can do is ignore the situation. As soon as it is apparent that you the landlord are not going to be able to meet your obligations to make buy-to-let mortgage payments, a landlord should take control of the matter by contacting their buy-to-let mortgage company.
Dealing with your mortgage lender
Firstly a landlord needs to appreciate that the last thing that a buy-to-let mortgage lender wants to have to do is repossess a residential investment property. This is always their last resort.
A landlord is therefore advised to discuss their financial situation with their BTL lender.
Depending on the type of mortgage that the landlord has, a buy-to-let lender may be able to:
- Reduce a landlord’s monthly BTL mortgage interest payments
- Increase the period of time over which the BTL mortgage is paid. This would mean paying more interest in the long-term
- Suspend the repayment of the capital and allow a landlord to make interest only payments on their BTL mortgage.
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
Landlords should be clear that the buy-to-let mortgage company will only agree to these measures if it is first satisfied that the landlord has a genuine financial case. This may involve a landlord submitting details of their financial situation directly to the buy-to-let mortgage lender or through a third party such as the Citizens Advice Bureau (CAB).
With a genuine case, most BTL mortgage lenders take a sympathetic stance as after all, a reduced payment is better than none at all. A landlord may have decided to dispose of their buy-to-let investment property and be actively pursuing this.
In this case most BTL mortgage lenders will be perfectly happy with this if it is clear that the landlord will be able to repay the debt at the end of the process. A buy-to-let lender is still likely to require mortgage payments to continue during the sale process but maybe prepared to accept reduced payments or add them to the loan balance.
Repossession – not the end of the story
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 necessarily be the end of a landlord’s debt problems. The process of repossession involves the mortgage company taking ownership of the residential 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 residential investment property and legal costs.
The buy-to-let mortgage lender has a legal duty to sell the residential 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 that the buy-to-let mortgage lender will take depends on the circumstances. Usually, the buy-to-let mortgage 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 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.
It should be said that buy-to-let mortgage lenders are committed to fair and sympathetic treatment of landlords who have suffered repossession. They accept that individual landlords should not face long delays before buy-to-let mortgage lenders contact them to discuss repayment of any shortfall. 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.
Landlords with financial problems should realise that they are not alone in this. Much can be done to overcome a landlord’s problems. The Property Hawk team is always willing to respond in anyway we can to assist or direct a landlord with financial difficulties. However, non of the team are professionally trained in respect of credit law and therefore a landlord might be better off speaking to some of these specialist organisations to get their free advice.
Citizens Advice Bureau (CAB)
The CAB offers free, confidential advice face-to-face or by phone. Most CABs also offer home visits and some give email advice.
National Debtline is a free, confidential service that gives independent advice about coping with debt. You can get information online or call the helpline on 0808 808 4000 (9.00 am to 9.00 pm Monday to Friday, 9.30 am to 1.00 pm Saturday).
Community Legal Service (CLS) Direct
CLS Direct offers free information about legal problems and can put you in touch with local advisers. You can get information online or call the helpline on 0845 345 4345 (9.00 am to 5.00 pm, Monday to Friday).
Disclaimer – The information and services provided by the Property Hawk website ("Website") does not constitute legal, financial, investment or tax advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser prior to entering into any binding contracts.