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Buy-To-Let Mortgages Withdrawn

Apr 3, 2008
The number of products available on the UK mortgage market has declined rapidly in recent months as lenders tighten their belts in order to lessen the effects of the credit crunch. Lenders in the UK have recently been withdrawing various types of products from the market including buy-to-let mortgages.

Recent reports on the UK home loan industry have indicated that as many as one third of all mortgage products offered by lenders, including banks and building societies, have been removed from the market as a direct result of the credit crunch. Buy-to-let mortgages have not escaped the cull despite the fact they are essentially commercial loans that are issued to borrowers based on the commercial viability of the properties they are secured against rather than a salary, wage, or other source of personal income.

This is an indication that no sector of the mortgage industry is safe from the credit crunch. While it may have seemed prudent to assume that buy-to-let mortgages may have escaped the lenders' cull due to their commercial nature of the products, the opposite has happened. Buy-to-let mortgages began to fall under the scrutiny of UK lenders several years ago as it became apparent that loan to value ratios were too high and the lending criteria was too relaxed.

Mortgage lenders began to realise that the residential properties they were allowing borrowers to secure their buy-to-let products against were overvalued and therefore underperforming in terms of the rents they were able to achieve. Deposits required had also reduced substantially and builder gifted deposits had created a false economy regarding the values of the properties being purchased for letting out to tenants.

Lending criteria for buy-to-let mortgages were subsequently tightened and in some cases lenders were refusing to lend against most new-build properties, especially leasehold apartments. This was the first indication that lenders believed the buy-to-let industry was over hyped and that properties were overvalued. Lenders began to reverse the trend of the early 2000s to loosen their lending criteria and started requiring larger cash deposits and more rental coverage. More recently, banks and building societies in the UK have been withdrawing home loan products altogether from the market, including some buy-to-let mortgages.

While this move will set off alarm bells in some quarters of the financial markets it should not lead to a crisis. Mortgage lenders are likely to be currently reevaluating their products in light of the credit crunch and will probably begin to offer revised products within the following few months. The products will almost certainly contain stricter lending criteria and rule out applicants with heavy adverse credit files. At the same time surveyors will be less inclined to exaggerate the values of properties they survey and will instead take a conservative approach.

The overall impact of the above for property investors is that they will find it difficult to secure buy-to-let mortgages on properties with inflated market values or inflated expected rental returns. This is a positive situation as it will reduce the risk of individuals being sold properties by developers or estate agents on false information. Surveyors will simply down value the inflated estimates helping to assure that borrowers will not over finance investment properties with buy-to-let mortgages.
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