News that the countries fifth largest lender, Bradford & Bingley has made an £8m pre-tax loss in the first four months of this year has spooked the Stock Market sending its shares into free-fall. The company has blamed problems with it’s buy-to-let mortgages. Bradford & Bingley have about a fifth of the UK ‘but-to-let’ market which is worth about £126bn but lenders exposure to these relatively new products may be far higher.
In the past few weeks it has emerged that there are a significant number of supposedly solid ‘owner-occupier’ mortgages which were in fact used by private landlords who have subsequently let their property in breech of their mortgage agreement.
Specific buy-to-let mortgages are in fact a comparatively new product. They have traditionally cost slightly more than a mortgage for an owner occupier. Some individuals with traditional mortgages have gone on to let their property when they have got married or left university seeing it as a property investment and an alternative to a stockmarket based pension.
According to ARLA there are over 2.7m private rental properties in the UK but we know that there are only around 1m official buy-to-let mortgages. Whilst some of course will have no borrowings at all, many will have traditional ‘owner-occupier’ mortgages which tend to stipulate that the property cannot be let without the lenders consent. Buy-to-let mortgages usually require a higher deposit (typically 85%) and often attract a higher borrowing rate (up to 0.25%) and it is unusual for the terms of a mortgage to be checked when a private letting is arranged.
I think there may be up to 100,000 mortgages that lenders think are being lived in by the borrower but are in fact unofficial buy-to-let products. Despite reports that rents are rising it is becoming harder for amateur landlords to cover the higher borrowing costs that many are facing. This will only add to the problems that lenders like B&B say they are experiencing and add to the downwards pressure on the housing market as these ‘investments’ are dumped when rental income falls short of the cost of the mortgage.