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Buy-to-Let Repossessions

Jun 2, 2008
With interest rates and household bills rising rapidly it is inevitable that property investors and owner-occupiers will begin to struggle financially. One key indicator that the affordability of property is in decline is the rate of repossessions. As the rate increases analysts usually conclude that the mortgagors en masse are struggling to keep up with their repayments and the property market is in decline.

The rate of repossessions of buy-to-let property has traditionally been lower than owner-occupied property. However some industry analysts are claiming that the gap is shortening, suggesting that there are more amateur landlords in the market than ever before. It is no wonder this has happened with buy-to-let investing receiving unprecedented exposure in the media in recent years.

Experienced landlords are less likely to over-borrow and mortgage their portfolio to a level that it will be put at risk from a few small rises in interest rates. Amateur landlords, however, are more likely to borrow as much as possible in order to secure their first buy-to-let property. The desire to rush in and get a foot in the door can be too tempting for some regardless of whether adequate research has been conducted.

Whether or not buy-to-let property repossessions are rising in proportion to overall repossessions is difficult to assess. However no one is arguing that the total number of repossessions - including owner-occupied and investment properties - is rising.

One factor that may be contributing to amateur investors over-borrowing is the increasing ease in which finance is available through buy-to-let mortgages. Ten years ago investors were forced to pay a minimum 15% deposit to buy an investment property and also had to prove that the rental income would cover 130% of the monthly rental payments.

These days investors of almost any age, financial situation, or level of property investing experience can borrow enough money to finance the entire purchase of the property they wish to buy. This could be in the form of 100% loan-to-value buy-to-let mortgages or a combination of mortgages plus loans from other sources, such as credit cards and personal loans, to finance the deposit.

Additionally some lenders only ask that the rental income covers 100% of the monthly mortgage payment, leaving no room for the extra expenses a landlord must endure. Such a lending policy also fails to account for void periods.

It may be that if an individual needs to borrow 100% of the property's value in order to buy it they may not be a suitable candidate for buy-to-let investing. An investor who doesn't have enough money for a deposit surely wouldn't have any funds set aside for void periods or unexpected major repairs and maintenance.

Because of this lenders are introducing products that are based on "affordability" rather than traditional lending criteria. Under such schemes the investor's overall finances are assessed to discover whether they can actually afford the commitment of a buy-to-let property.

This will include an assessment of the income potential of the property in question in addition to an assessment of the borrower's personal finances. Of course experienced landlords will have an easier time convincing lenders that they are a safe bet than inexperienced amateurs.
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