Landlords could be a threat to banks and wider financial stability

cells

Graham_Devon wrote: »

As far as I'm aware, the CML only include stats from their members.

75% of unregulated mortgage lending is in the BTL sector, which I believe the CML data will simply ignore. (I may be wrong).

Either way, you appear to be saying that the FPC and the BOE figures are wrong?

http://www.bankofengland.co.uk/publications/Documents/fsr/2015/dec.pdf

Page 31 has all the data.

They are probably not wrong but I think you are translating what they say into what you want to hear

Strong growth in buy-to-let lending, and the potential for underwriting standards to slip, may have implications for financial stability.

They basically say if standards slip it may have implications for banks losing money in a downturn. It does not say standards have slipped or that they will and that it will definitely cause the four horsemen to arrive


They go on to say....

New loans to buy-to-let investors are often subject to less
stringent affordability tests than loans to owner-occupiers.
According to industry standards, the affordability of a
buy-to-let loan is typically tested by ensuring that the rental
income exceeds 125% of loan interest payments at a
mortgage interest rate of 5%–6%. In contrast, and in
accordance with the FPC’s June 2014 Recommendation, the
affordability of loans to owner-occupiers is tested by ensuring
that the borrower has sufficient income to cover their
mortgage payments at a more stringent mortgage interest
rate of around 7%, despite owner-occupier mortgage rates
tending to be around 0.7 percentage points lower.(1)

This is true typically BTL has a 5-6% rental cover at 125% required. Owners are at 7% interest rate requirements. However it ignores that fact that it is rare for a BTL to get a mortgage with less than 25% down and most BTL will invest a good £5-15k doing up the place post purchase increasing its value and achievable rent. Also in my experience surveyors tend to be quite conservative on the rent typically guessing ~10% than what is actually achieved



In short Graham would you feel safer lending your money to a BTLer who puts 25% down and had a paid off main residence or would you feel safer lending to a 25 year old working at costa coffee who has 5-10% down?

PS this is in no way an argument for BTL. You can be against BTL but think its for banks similar risk to residential lending and maybe even lower risk.

Graham_Devon

cells wrote: »

They are probably not wrong but I think you are translating what they say into what you want to hear

Translating? Me?

Have you checked your own posts on this thread?!?!

They basically say if standards slip it may have implications for banks losing money in a downturn. It does not say standards have slipped or that they will and that it will definitely cause the four horsemen to arrive

And I've never said otherwise? Maybe you could point out where I have?

It appears to me you are getting confused between what's been said and what you think has been said.

What the BOE is worried about is that a 300 basis point increase in interest rates will see 60% of newly bought BTL properties no able to achieve a rent that is 125% of their rental income. So basically, 3.5% rates would see 60% of new (not sure what qualifies as new) BTL properties breaking even.

They fear that will lead to landlords looking to exit and therefore create a fall in the housing market. That fall will then exacerbate the situation as described above and you have a self feeding monster unleashed on you.

I think that's a fair point and worthy of the discussions the BOE are having, but you seem intent to carry on with this 25% deposit stance which you appear to think avoids the above.

All your vague facts and personal assumptions you are throwing around does not change this. You need to read what people state, not what you think they state.

cells

in that report it also says

Assessed against these affordability metrics, buy-to-let
borrowers may be more vulnerable than owner-occupiers to
an unexpected rise in interest rates or a fall in income. For
example, if mortgage rates rose by 300 basis points, the
increment by which the FPC recommended the affordability of
mortgages to owner-occupiers is tested, nearly 60% of
buy-to-let borrowers who took out loans recently would

see
their rental income no longer covering 125% of their interest
payments. By comparison, only 4% of recent owner-occupier
borrowers would see their mortgage debt costs rise to above
40% of income, a level above which households are more
likely to experience payment difficulties (Chart A.26).(2)

This is a good point but it fails again to fully understand the nature of many people who do get into BTL

I am a fairly 'recent' landlord, and for my lot mortgage rates would need to go up ~5% for the break even of rents vs mortgages

Many landlords will also have a significant 'buffer' and could survive negative cash flow for some time. For me personally I could take 5% increase indefinitely and a 10% increase in interest rates for a year.

But of course if interest rates went to 10% I would be the least of the economies troubles. For a start the government debt pile cost would jump towards £150B a year....more than it costs to run the HNS.... so it simply is not a realistic what if...

cells

Graham_Devon wrote: »

Translating? Me?

Have you checked your own posts on this thread?!?!

And I've never said otherwise? Maybe you could point out where I have?

It appears to me you are getting confused between what's been said and what you think has been said.

What the BOE is worried about is that a 300 basis point increase in interest rates will see 60% of newly bought BTL properties no able to achieve a rent that is 125% of their rental income. So basically, 3.5% rates would see 60% of new (not sure what qualifies as new) BTL properties breaking even.

They fear that will lead to landlords looking to exit and therefore create a fall in the housing market. That fall will then exacerbate the situation as described above and you have a self feeding monster unleashed on you.

I think that's a fair point and worthy of the discussions the BOE are having, but you seem intent to carry on with this 25% deposit stance which you appear to think avoids the above.

All your vague facts and personal assumptions you are throwing around does not change this. You need to read what people state, not what you think they state.

obviously i was being a bit sarcastic with the four horsemen statement but anyway...

I don't think 60% of new BTLs would be under water in a 3.5% base rate situation for multiple reasons.....

Most BTL mortgages are fixed for a period 2/3 years. So rents will be 5-10% higher by the end of the fix when new interest rates are to impact on their mortgage vs rents

A lot of landlords have multiple properties so they will be more concerned by the total rent and total mortgages. For myself +5% base rates instantly would be survivable. Of course +5% over say 5 years would be no problem as rents will be higher in 5 years

The landlords who have only 1-2 properties will likely be willing to continue paying the mortgage and sub the difference with their own wages/savings. Generally these people are not poor

Surveyors in my experience under-estimate rents so what the data the BOE are getting and actual rents achieved is different

a lot of landlords will invest into the property right from the beginning (eg spending £5-10-20k doing it up which increases the value somewhat and the rent achievable)

and most importantly of all, most landlords have a buffer of savings. If a landlord buys a £500k BTL in London they will soon be handing over £30,000 simply for stamp duty. Clearly if they have £30k to pay for stamp duty they are going to have some reserves to pay for the fraction of the ~£900pm more in interest that the rents dont cover if rates go up 3%

Graham_Devon

cells wrote: »

This is a good point but it fails again to fully understand the nature of many people who do get into BTL

It doesn't "fail to understand the nature" at all. It's nothing to do with nature and all to do with raw fact and data.

It specifically states that 60% would find they break even or face a loss. Which means that 40% would still be operating a profit (i.e. you are one of the 40%).

You might not "think" it's 60% (and I'm pretty positive you've missed the "newly bought" statement), but your thoughts and finger in the air feeling doesn't really alter fact.

cells

Graham_Devon wrote: »

It doesn't "fail to understand the nature" at all. It's nothing to do with nature and all to do with raw fact and data.

It specifically states that 60% would find they break even or face a loss. Which means that 40% would still be operating a profit (i.e. you are one of the 40%).

You might not "think" it's 60% (and I'm pretty positive you've missed the "newly bought" statement), but your thoughts and finger in the air feeling doesn't really alter fact.

did you not read my reasons as to why the 60% bit might be wrong

eg surveyors tend to be cautious in rental assessments (every single one I have had undervalued the first rent achieved)

Landlords tend to spend a bit on purchases which uprate the value and achievable rents

and also why it might not matter in any case (eg little to no forced sales)

cash buffers. portfolio outlook. fixed rate for a period. increasing rents. other assets. EarlyRepaymentCharges

and with house prices going up, a lot of landlords will be able to offset some of the mortgage rate increases by going from 75% LTV bands to 60/65% bands and some of it with higher rents


I will say I agree with the BOE report. If rates go up and go up quickly a lot maybe even their suggested 60% of new purchase landlords will be under water (eg mortgage interest bigger than rent). However I do not think it will result in many forced sales for the reason above.

Generali

cells wrote: »

both are v.low already

~700 repo a quarter for BTL stock of ~1.7 million loans
~1,800 repo for owners of ~8 million loans

a much bigger annoyance for banks must be the customers in arrears. Over 100,000 owner loans are in arrears of 2.5% or more while for BTL its less than 6,000.

Proportionally owners are 4 x more likely to be in arrears and be more heavily in arrears.

And as I keep banging on, arrears and repos dont cause a 100% loss of the loan a lot and sometimes all of it is recovered

Both sectors are very low risk lending

Because interest rates are at record lows. If you get repossessed in the current environment you're either desperately unlucky or an utter plum.

It is highly likely that interest rates will rise from here, probably substantially. If the BoE hasn't taken steps to look through to that likely outcome it would meet brickbats from every Google expert on credit risk.

Generali

cells wrote: »

in that report it also says



This is a good point but it fails again to fully understand the nature of many people who do get into BTL

I am a fairly 'recent' landlord, and for my lot mortgage rates would need to go up ~5% for the break even of rents vs mortgages

Many landlords will also have a significant 'buffer' and could survive negative cash flow for some time. For me personally I could take 5% increase indefinitely and a 10% increase in interest rates for a year.

But of course if interest rates went to 10% I would be the least of the economies troubles. For a start the government debt pile cost would jump towards £150B a year....more than it costs to run the HNS.... so it simply is not a realistic what if...

Firstly most of the Government's debt is issued at a fixed rate. Secondly the Government can simply print money to pay its debts or simply force people to buy bonds (this has been done many times in the past both openly and via the means of enforced risk management).

antrobus

cells wrote: »

They are probably not wrong but I think you are translating what they say into what you want to hear...

Oh, I don't know.

I'm not sure how the statement that "rates of credit loss on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers" as meaning anything other than what it says.

Generali

antrobus wrote: »

Oh, I don't know.

I'm not sure how the statement that "rates of credit loss on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers" as meaning anything other than what it says.

It makes sense when you think about it. Which headline do you think you are more likely to read:

Father of 2, cancer victim, in desperate battle to keep family home.
Father of 2, cancer victim, in desperate battle to keep BTL investment.

?

Some people seem to think that the BoE makes this stuff up or does it for a laugh because it's Friday afternoon and they can't think of anything better to do. The Bank of England has stated that they feel that BTL lending is a big risk because:

1. They've seen banks' books as a result of stress testing'
2. They've got a plan as to where interest rates are likely to go over the next couple of years
3. They can see what could happen to banks as a result of interest rate rises

For every landlord who has a strong business plan there is one that is an utter chancer who is up to her eyeballs in debt and is in all sorts of trouble if their tenant's boiler blows up or they get any sort of substantial void.