Why do I need a buy to let mortgage?

saajan_12

always_sunny wrote: »

Looking at the stats it seems that home occupied have higher rate of repos than BTL (and thus carry higher risk)



As long as the mortgage is paid, the lender shouldn't care what the use is for (residential/let).

This is a common fallacy to look at just the frequency / probability of repossessions. To quantify the lender's risk, you also have to look at the cost / loss if there is a default / repossession. This includes cost getting to point of sale, as well as the basis to the outstanding loan.

-> Lenders are often willing to offer interest only for BTLs as the investor can sell up to repay the loan, whereas for a residential you still need somewhere to live. But that means the total loan never decreases for a BTL, leaving higher risk that the sale may not cover the loan if house values drop.

-> In a residential, the lender has a contract with the occupant that they can repossess in the event of a default. In a BTL, the tenant may have a legal tenancy with a fixed term which is still in force beyond a default in payments. So, the lender has additional costs as they become a landlord, while not receiving mortgage payments until they can serve notice. This increases the cost of a repossession.

The above mean that they have higher risk and offset this by charging higher interest. We don't exactly want to encourage subprime mortgages right..

But further, there is an element of supply and demand. Partly due to only paying the interest, rents are often much higher than mortgage payments, increasing the demand from BTL investors. Lenders can increase the interest cost and BTL investors will still demand it. To keep up this demand, lenders have to be strict in restricting BTL investors to BTL mortgages otherwise they would just move to residential.
It's like it doesn't cost a train company any more if an extra passenger jumps on, but they still have to check tickets otherwise no one will buy one and they lose the revenue.

steampowered

always_sunny wrote: »

Remember, most countries do not have these 'complexities' you seem to have here in regards to housing. Offers are not binding, chain and triple chains and the likes.

I find it extraordinary that you are criticising the UK system because it has chains.

Are you really suggesting that other countries do not have a situation where somebody needs to sell their property in order to pay for the next one??!?!?!

Offers aren't binding in Australia, the United States, Canada or New Zealand either. The law of contract in those countries is based on English contract law - the principles of offer and acceptance work in exactly the same way.

I don't know how it works in civil law countries but I very much doubt an offer made during negotiation is binding in those countries either.

LdnFtB

saajan_12 wrote: »

This is a common fallacy to look at just the frequency / probability of repossessions. To quantify the lender's risk, you also have to look at the cost / loss if there is a default / repossession. This includes cost getting to point of sale, as well as the basis to the outstanding loan.

-> Lenders are often willing to offer interest only for BTLs as the investor can sell up to repay the loan, whereas for a residential you still need somewhere to live. But that means the total loan never decreases for a BTL, leaving higher risk that the sale may not cover the loan if house values drop.

-> In a residential, the lender has a contract with the occupant that they can repossess in the event of a default. In a BTL, the tenant may have a legal tenancy with a fixed term which is still in force beyond a default in payments. So, the lender has additional costs as they become a landlord, while not receiving mortgage payments until they can serve notice. This increases the cost of a repossession.

The above mean that they have higher risk and offset this by charging higher interest. We don't exactly want to encourage subprime mortgages right..

But further, there is an element of supply and demand. Partly due to only paying the interest, rents are often much higher than mortgage payments, increasing the demand from BTL investors. Lenders can increase the interest cost and BTL investors will still demand it. To keep up this demand, lenders have to be strict in restricting BTL investors to BTL mortgages otherwise they would just move to residential.
It's like it doesn't cost a train company any more if an extra passenger jumps on, but they still have to check tickets otherwise no one will buy one and they lose the revenue.

What's also missing from this picture is the ratio of OO to BTL - i.e. a per capita rate of repossessions rather than a total number.