Why do lenders restrict buy to let mortgage LTV’s?
The proportion of a property value that you can raise on a mortgage is known as the ‘loan to value’. You may see this reduced to the initials ‘LTV’. The maximum ‘buy to let’ mortgage LTV’s available however are lower than those for normal residential mortgages.
Why is this?
There are number of reasons for this, but they are largely down to what lenders see as risk factors.
One reason is that many buy to let mortgages are allowed to be conducted on an ‘interest-only’ basis. Consequently, by only paying the interest the debt will never reduce. Therefore, if the economy sees house prices falling, as happened after the last credit crunch, this could lead to ‘negative equity’. This is where house values are lower than the debt owed on them.
Lenders made substantial losses on buy to let lending resulting from the 2008 credit squeeze and downturn in house prices. The resulting negative equity meant that some repossessed houses were sold at a loss. The lenders are therefore naturally wary of this ever happening again.
A further risk to lenders is that borrowers may find themselves without tenants for long periods. The mortgage payments may not get paid, leading to arrears and increasing debts. If the lender has granted a loan for too much of the property value, repossession could lead to them losing money as the debt and selling costs grow.
Selling on the mortgages
There is another appeal for low buy to let mortgage LTV’s to lenders. In the past a lot of new buy to let mortgage funding was made by lenders selling on large packages of existing buy to let mortgage assets, releasing cash to lend again. This was known as ‘securitisation’. However this bubble burst following problems in the American mortgage market. This involved in a high number of defaulting borrowers and led to repossessions ans significant losses. These securitised assets therefore became bundles of bad debts or more commonly, ‘toxic debt’.
This had a knock on effect in the UK as many lenders had either bought such debts or were afraid to do so again. Many will recall the collapse of Northern Rock, who relied heavily on this type of funding. These problems created the part of the credit squeeze affecting mortgage borrowing. Northern Rock were bailed out by the Government but it took until May 2019 for all of their bailout monies to be repaid.
So how much will lenders offer on buy to let mortgages now?
The lenders are now keen to see a greater stake from the property investor and for most a deposit of at least 20-25% is required. With larger deposits, lenders are more secure and can make the interest rates more favourable with smaller set up fees. Whilst high buy to let mortgage LTV’s are available in the market, the set up fees are very high.
If the securitisation market is ever to return with any volume in the UK, it will be the packages of safer, low LTV loans that are the most attractive to the banks and large corporate buyers.
There have been significant changes in the buy to let markets in recent years which have made such purchases riskier. There are more details on our buy to let explained page. Lenders are cautious on maximum loan amounts – and don’t expect this to change much in coming years.
Regulation of buy to let mortgages
Note: the Financial Conduct Authority do not regulate most buy to let mortgages. Those which are regulated are those where more than 40% of the property is used or will be used by the borrower or a member of the borrower’s immediate family. Buy to let is regarded as a commercial activity and you will be regarded as a business owner. You will therefore not have the same borrower protection that is available to residential borrowers.
For more information regarding your buy to let options, please use the ‘Contact Us’ form at the bottom of the page.