Brendan Burgess
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With pay cuts for most people, 15% unemployment, hugely reduced incomes for self-employed, and higher income taxes for everyone, it’s easy to understand why 10% of home loans are in arrears over 90 days.
But it’s much more difficult to understand why buy-to-let mortgages are in even higher arrears. The rental market is very good, even if it's 25% off its peak. It’s easy to get tenants who will pay good rents. Interest rates are very low. In the majority of cases the rental income should be sufficient to pay at least the interest on the loan.
So it’s very surprising that we have high arrears on buy to lets.
| buy to lets|home loans
Accounts in arrears over 90 days |18%|11%
Restructured and not in arrears|10%|6%The rent should be covering the interest for at least 90% of buy to lets
Here is a typical example of a borrower who bought at the peak.
Mortgage|€330,000
Interest rate|1.6%
Annual interest|€5,300
Annual rent|9,600
Annual capital and interest repayments over 20 years @ 1.6%|€19,000
Annual interest at an SVR of 5.5%|€18,000
Annual capital and interest repayments over 20 years @5.5%|€27, 240If they are on an interest-only tracker, they should not be in arrears. The rent would be sufficient to cover the interest, other costs and taxes.
He is in massive negative equity, but the investment itself is still profitable.
He will go into arrears
· If the bank switches him to interest and capital
· If he is on an SVR mortgage
Many buy to lets are on cheap trackers
Approximately 70% of the total buy-to-let book are on cheap trackers. I suspect that an even higher proportion of those who bought at the top of the market have cheap trackers.
Older mortgages were taken out on standard variable rates and the landlords probably never got around to switching mortgages. But they have paid off a good lump of the capital, so the ongoing interest charge is low.
Investors who bought in 2008 are more likely to be on standard variable rates and these would be in the most trouble now. They can’t service even the interest on their mortgages and they are in deep negative equity.
In some cases, landlords should be making up the shortfall from their other income
Even if the rent is not sufficient to cover the mortgage payment, the borrower should be making up the shortfall from their other income. Of course, most people don’t have spare income to make up the shortfall.
I have been surprised at the way people compartmentalise their investment properties. I have heard many people saying “the rent is not enough to pay the capital and interest, so the bank will have to reschedule”. These were people who had good salaries and I pointed out to them that they should be making up the shortfall from their other income. They were horrified at the suggestion.
Interest-only is fine for buy to lets
The majority argue that an interest-only loan on a person’s home is not sustainable as they may still have a mortgage when they retire. Whether you agree with this or not, it does not apply to buy-to-let properties. If a borrower can pay the interest, but only the interest, both the lender and borrower should be satisfied with this. Property is a long-term investment, and hopefully, in time, the person’s income will improve or property prices will rise.
A lender should not be happy to receive interest-only on a cheap tracker. However, in practice, most lenders seem to accept this temporarily.
15% of buy to lets have been rescheduled
This surprised me. I had thought that the reason for the high arrears was that the lenders were under no obligation to reschedule buy to let mortgages. The Mortgage Arrears Code, in effect, forces banks to reschedule home loans. But there is no MAC for buy to lets and the banks are still rescheduling them fairly easily.
Owners of buy to lets are much less worried about them that they are about their homes
Home owners try to keep up their mortgage so that they won’t lose their home. Buy to lets are a lot less worried.
Many investors have just given up the ghost
When an investor sees that the property which was supposed to make them lots of money has now halved in value, they just give up caring and stop making an effort to stay up to date.
It is the multiple landlords who are in the most severe arrears
has reported that amateur landlords have a similar level of arrears to owner occupiers, but the arrears profile of people with multiple properties is problematic.
If a professional landlord has no other income apart from the rent which they are receiving from their properties, they are probably diverting this rent to pay their living expenses. Against that, I would expect that professional landlords would have acquired their properties over a period of time and would have lower loans against properties which were acquired earlier in the cycle.
If a professional falls into arrears, are all his accounts classified as in arrears if they are cross-charged? If he spreads the rent around to pay something against every mortgage, does that mean that the performing ones are in arrears.?
The rent is not covering the interest
· The landlord can’t find a tenant
· The tenant is in arrears on their rent to the landlord
· The borrower has an expensive SVR loan
And the borrower is unable or unwilling to make up the difference from their other income. Most landlords seem to compartmentalise their investment properties. If the rent does not cover the repayments, they simply won’t touch their other income or assets to make up the shortfall.
Some borrowers are using the rent to pay their other expenses instead of paying their mortgage
In most cases, the rent will cover the interest and so, the lender should reschedule and the loan should not go into arrears.
However, people are struggling on all fronts, and it’s likely that some landlords are diverting the rent to pay their ordinary living expenses and maybe even their home loan repayments.
They allow the buy to let property to go into arrears and hope that they will be able to do a deal with the lender to repossess it and write off the shortfall.
In extreme cases, the lender will appoint a rent receiver. However, up to the end of September there were only 566 cases where a rent receiver had been appointed. It is not clear if each case represents one account or if a case might be a few properties.
Miscellaneous factors, although few in number, accumulate
So will the banks seek to repossess a lot of buy to lets?
I doubt it. While the arrears figure is very high, if the borrowers are paying the interest, then the lenders should be happy enough.
If the borrowers are withholding the rent, then the bank can appoint rent receivers. This seems more sensible than repossessing the property.
It would be in the interest of the lenders to repossess buy to lets with cheap trackers as they can lend the money out again at a higher interest rate. But as these loans are more likely to be performing, then the banks wil probably not repossess them.
But it’s much more difficult to understand why buy-to-let mortgages are in even higher arrears. The rental market is very good, even if it's 25% off its peak. It’s easy to get tenants who will pay good rents. Interest rates are very low. In the majority of cases the rental income should be sufficient to pay at least the interest on the loan.
So it’s very surprising that we have high arrears on buy to lets.
Accounts in arrears over 90 days |18%|11%
Restructured and not in arrears|10%|6%
Here is a typical example of a borrower who bought at the peak.
Interest rate|1.6%
Annual interest|€5,300
Annual rent|9,600
Annual capital and interest repayments over 20 years @ 1.6%|€19,000
Annual interest at an SVR of 5.5%|€18,000
Annual capital and interest repayments over 20 years @5.5%|€27, 240
He is in massive negative equity, but the investment itself is still profitable.
He will go into arrears
· If the bank switches him to interest and capital
· If he is on an SVR mortgage
Many buy to lets are on cheap trackers
Approximately 70% of the total buy-to-let book are on cheap trackers. I suspect that an even higher proportion of those who bought at the top of the market have cheap trackers.
Older mortgages were taken out on standard variable rates and the landlords probably never got around to switching mortgages. But they have paid off a good lump of the capital, so the ongoing interest charge is low.
Investors who bought in 2008 are more likely to be on standard variable rates and these would be in the most trouble now. They can’t service even the interest on their mortgages and they are in deep negative equity.
In some cases, landlords should be making up the shortfall from their other income
Even if the rent is not sufficient to cover the mortgage payment, the borrower should be making up the shortfall from their other income. Of course, most people don’t have spare income to make up the shortfall.
I have been surprised at the way people compartmentalise their investment properties. I have heard many people saying “the rent is not enough to pay the capital and interest, so the bank will have to reschedule”. These were people who had good salaries and I pointed out to them that they should be making up the shortfall from their other income. They were horrified at the suggestion.
Interest-only is fine for buy to lets
The majority argue that an interest-only loan on a person’s home is not sustainable as they may still have a mortgage when they retire. Whether you agree with this or not, it does not apply to buy-to-let properties. If a borrower can pay the interest, but only the interest, both the lender and borrower should be satisfied with this. Property is a long-term investment, and hopefully, in time, the person’s income will improve or property prices will rise.
A lender should not be happy to receive interest-only on a cheap tracker. However, in practice, most lenders seem to accept this temporarily.
15% of buy to lets have been rescheduled
This surprised me. I had thought that the reason for the high arrears was that the lenders were under no obligation to reschedule buy to let mortgages. The Mortgage Arrears Code, in effect, forces banks to reschedule home loans. But there is no MAC for buy to lets and the banks are still rescheduling them fairly easily.
Owners of buy to lets are much less worried about them that they are about their homes
Home owners try to keep up their mortgage so that they won’t lose their home. Buy to lets are a lot less worried.
Many investors have just given up the ghost
When an investor sees that the property which was supposed to make them lots of money has now halved in value, they just give up caring and stop making an effort to stay up to date.
It is the multiple landlords who are in the most severe arrears
has reported that amateur landlords have a similar level of arrears to owner occupiers, but the arrears profile of people with multiple properties is problematic.
If a professional landlord has no other income apart from the rent which they are receiving from their properties, they are probably diverting this rent to pay their living expenses. Against that, I would expect that professional landlords would have acquired their properties over a period of time and would have lower loans against properties which were acquired earlier in the cycle.
If a professional falls into arrears, are all his accounts classified as in arrears if they are cross-charged? If he spreads the rent around to pay something against every mortgage, does that mean that the performing ones are in arrears.?
The rent is not covering the interest
· The landlord can’t find a tenant
· The tenant is in arrears on their rent to the landlord
· The borrower has an expensive SVR loan
And the borrower is unable or unwilling to make up the difference from their other income. Most landlords seem to compartmentalise their investment properties. If the rent does not cover the repayments, they simply won’t touch their other income or assets to make up the shortfall.
Some borrowers are using the rent to pay their other expenses instead of paying their mortgage
In most cases, the rent will cover the interest and so, the lender should reschedule and the loan should not go into arrears.
However, people are struggling on all fronts, and it’s likely that some landlords are diverting the rent to pay their ordinary living expenses and maybe even their home loan repayments.
They allow the buy to let property to go into arrears and hope that they will be able to do a deal with the lender to repossess it and write off the shortfall.
In extreme cases, the lender will appoint a rent receiver. However, up to the end of September there were only 566 cases where a rent receiver had been appointed. It is not clear if each case represents one account or if a case might be a few properties.
Miscellaneous factors, although few in number, accumulate
- Unlettable properties in provincial towns and rural areas
- Some properties have aged badly and are difficult to let. Landlord can't afford to renovate
- Some complexes have deteriorated and are difficult to let
- Ghost estates
- Building defects such as pyrite and Priory Hall
So will the banks seek to repossess a lot of buy to lets?
I doubt it. While the arrears figure is very high, if the borrowers are paying the interest, then the lenders should be happy enough.
If the borrowers are withholding the rent, then the bank can appoint rent receivers. This seems more sensible than repossessing the property.
It would be in the interest of the lenders to repossess buy to lets with cheap trackers as they can lend the money out again at a higher interest rate. But as these loans are more likely to be performing, then the banks wil probably not repossess them.
