Independent review and analysis

Buy to Let Equity Erosion

As long ago as December 2001 John Tiner, the then Managing Director of the FSA, referring to buy to let lending at a CML conference, said “We would not wish to see, for example, a relaxation of loan to value or rental cover without lenders first making a clear analysis of the risks.”

Clearly such a robust statement should have sent a strong message to regulated firms; even in respect of their products that were not directly regulated. However, against the background of regulator’s advice, we saw over the middle of the last decade, an increase in buy to let loan to value ratios and a reduction in rental cover calculations. At the height of the market, lenders were offering buy to let mortgages up to 90% LTV with rental coverage as low as 100%.

The regulator was correct to focus lenders’ attentions on these two criteria since they have a direct influence on a customer’s ability to make mortgage payments and the amount of any equity margin that might be eroded in a rental void period.

In the current economic situation, with stagnant house price inflation, it is easy to see how quickly an apparent 10% or 15% equity position can be eroded, due to either rental voids or tenant’s arrears. On top of this, there is often a reduction in the valuation after possession, resulting from tenants general neglect for the property and also additional possession/sale costs to be taken into account.

Of course, it is entirely possible that lenders heeded the advice of the regulators and carried out appropriate risk assessments before the relaxation of buy to let criteria, in which case there should be no problem in releasing the credit committee minutes showing the decision making process of lenders. It seems to us that it is entirely justifiable that such information should be disclosed in all buy to let lending disputes.

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