Should Buy To Let Mortgages Be Regulated?

Should Buy To Let Mortgages Be Regulated?

Why we should consider buy to let mortgages being regulated?

When I was first asked this question, my initial response was ‘of course they should be regulated’. This was partly driven by the fact that I find far too many people investing in buy to let property without doing the level of due diligence on a property that they would if they were buying a home.

I also think that people often believe property is more likely to deliver an investment return than a pension or other financial investment. Personally, I love property and feel very comfortable in being sure it will give me a return, but I also take advantage of financial investment products, specifically investing in a pension due to the tax breaks I receive.
 
Unfortunately some people are happy to buy a property to let out by handing over a cheque and full control of their investment monies to someone else to source and buy on their behalf. As a result, investors seem happy to have properties bought for them they haven’t seen, haven’t done any independent analysis on and just think they can trust people because ‘they liked them’.

Anyone that invested with Passive Investments recently and were badly burnt when they went bust, are probably wishing someone – for example a mortgage advisor or lender – would have made them carry out independent third party due diligence. And the ‘property investment’ system SHOULD have facilities to protect an investor, currently it doesn’t and this needs to change. If you want to invest in property and not do any of the work, including your own extensive due diligence, you do so at the risk of losing every penny you pay to a company and neither the FSA or the OFT seem able or willing to help you, so you are very much on your own!
 
Think I’m exaggerating? Then just pick up the phone to Paul Shamplina and his team at Landlord Action. They work on a daily basis with landlords that have handed money over to buy to let property sourcing or ‘armchair investment’ companies, and they spend their time trying to get money back that landlords have lost.

So the question is, would regulating buy to let mortgages help this situation? And to answer this I researched a number of repossessed properties to identify if there are lots of buy to let landlords being repossessed because they were lent money when they perhaps shouldn’t have been?

Buy to Let Mortgage Repossessions
Currently statistics from the Council of Mortgage Lenders (CML) show that repossessions aren’t actually that high and are typically less than the homeowner market, which is expected to have around 48,000 repossessions in 2009 versus 1,600 new buy to let repossessions and 2,200 properties in possession in Quarter 3 of 2009.
  
In 2008 there were 1,157,000 buy to let mortgages of which 26,700 (2.31%) were over three months in arrears and of these, 7,900 had a ‘receiver of rent’ acting on behalf of the lender. Only 2,300 properties were actually repossessed. This represents less than half a percent of all buy to let mortgages ending up in repossession.

In 2009 things did get worse, and in Quarter 1, of 1,164,300 mortgages, 35,600 (3%) were in arrears for three months or more and of these 9,200 had a ‘receiver of rent’, while repossessions jumped up to their all time high of 2,500 in Quarter 2 of 2009. However, Quarter 3 revealed that over 12,500 properties were having their rent transferred to the lender rather than to the buy to let landlord, and this figure has risen from a low of 400 in Quarter 3 of 2006 which is a rise suggesting that there is a growing problem, albeit still only accounting for 1% of all mortgages.

According to Michael Coogan, Chief Exec of CML, the majority of these repossessions were made because the owners lost their job – not because of any bad advice or lack of due diligence on behalf of the lender or mortgage advisor.

So, therefore based on repossessions, the cost versus the benefit of introducing buy to let regulation is unlikely to prevent future repossessions.

There is one thing though that these numbers ignore and that is how many buy to let landlords will be able to cope with the mortgage payments when the interest rates return to ‘normal’ and investors have to manage mortgage rates of 5%-7%, particularly when the average rental return for property according to the Findaproperty Rental Index is only 4-5%.
However, it’s not just the number of repossessions that should decide whether buy to let mortgages should be regulated, so our next articles look at the pros and cons of regulating mortgages from my view, the lender’s, legal and wealth management perspective.

Article Two – What Mortgage Regulation currently exists and how does it protect borrowers?