A must-read for all landlords: A frustrated landlord speaks out

Reply to the comment left by Paul Smith at 26/03/2024 - 19:54
Nothing to do with their costs increasing. If the BOE increases rates then they are duty bound to follow. You cannot have a bank whose interest rate is uncompetitive (for the SAVERS) otherwise they would go elsewhere (yes, I know the savers rates are still poor).Increasing the rates also restricts the amount of mortgages available (this is a good thing) otherwise they would not have enough funds to satisfy the mortgage demand if the rates did not follow the BOE

Reply to the comment left by GlanACC at 27/03/2024 - 12:41
Gilt rates are a key driver of mortgage rates, and they themselves are based on the market expectations of the direction of BoE base rate.

Hence the huge jump in mortgage rates following the Liz Truss episode and the fact that mortgage rates are in constant flux despite BoEBR being unchanged since last August.

It was all so simple back in the day, take deposits and lend it out, at variable rates on a margin to cover costs and give a profit. And nobody needed a mortgage broker!

Reply to the comment left by GlanACC at 27/03/2024 - 12:41
Interesting, maybe we don't need to defend the banks, their profits are their fortress. The BoE affordability rules in place for BTL products, stress tested borrowing landlords against a £2 increase in mortgage costs for every £100 borrowed. The same organisation then put the rates up £5.24 for every £100 borrowed and scrapped some rules. It's a bit like telling you a bag of carrots will cost £2 then charging you £5.24. The fact they gave some of this money to savers makes Andrew Bailey look like a reverse Robin Hood, taking from the poorer borrowers and giving to those with savings? We were told interest rate rises were absolutely necessary to slay the dragon that was inflation and financial pain was the tool to curb spending. When we apply that to Landlords we see very different effects on different groups of landlords and sadly this ripples down to tenants and appears to destabilise the rental markets? Roughly 1/3 of landlords were lucky enough to own their properties outright. They face no increase in costs and receive extra money on their savings, these fortunate folk are not asked to contribute towards inflation and in have additional unexpected disposable income to spend as they see fit? The second group of landlords again currently about 1/3 are again fortunate and much to Andrew Bailey's annoyance are still sheltered in the calm waters of fixed rate deals so again have not helped reduce inflation by paying more money to the banks. The third group of landlords again around 1/3 have faced the full wrath of Andrew Bailey and his regulatory interest rate policy. They are fighting the front line, paying all the landlords costs to reduce inflation and the government and banks appear to have been extremely unsympathetic. They know the costs are up to three times higher than many of these landlords were stressed tested at, by the BoE affordability rules but there are few meaningful concessions. In fact some banks ensure they charged as soon as legally possible.Tge concession is the banks allow these landlords to accrue the money they can't afford to pay so their debt rises and the banks add more interest. This is a punitive measure that effectively fines landlords who borrowed within the BoE rules. Meanwhile some of the extra windfall the banks receive from this punished group of landlords is given to savers and some is kept for profit. Perhaps this policy forces some landlords to put up rents, while others don't need to but may as well follow suit. This policy appears bad for tenants and borrowing landlords. It was the BoE that changed the game by putting interest rates up higher than other countries and higher than it's own stress test rules. So far it is a minority of landlords and tenants who are being made to pay for the chaos this policy is causing in the rental markets. Arguably the banks could and should have done more to honour stress testing rules for a minority of borrowers who had borrowed in good faith rather than scrap the rules and charge the maximum amount possible as quickly as possible.

Reply to the comment left by Paul Smith at 28/03/2024 - 07:36
I’d agree that over the past decade or so it would have been unwise to rely on a BoE Governor telling you the weather if he was looking out the window.

Of course interest rates are a very blunt tool now so many are on fixes compared to a generation ago when most mortgages were variable - not forgetting BTL mortgages are dwarfed by owner occupier mortgages.

When it comes to BTL, there are huge differences in pre crash and post crash. Pre saw them churned out at 85% LTV. Post crash saw lenders charging high margins over BoEBR for fixes and moving to managed SVRs rather than margin over base - SVRs that were often 4 or 5% over base rate (as opposed to, say, 1.75% pre crash).

Against this back drop the Mortgage Market Review (MMR) came into effect in 2014. Not BoE but Government mandated. Stress tests under this were more than just 2% rise in base rate, but there were other factors, eg focus on short term fixes rather than 5 years plus, tighter rental coverage. And perhaps the most significant the removal of the ability to simply count increasing rental income from an expanding mortgaged portfolio as allowable to underpin even more borrowing. Four BTL mortgages was the level when full scrutiny of a BTL portfolio was required plus external income requirements.

This was all lead by Osborne and tied in with the battering of landlords with S24 etc after the 2015 election win.

Reply to the comment left by Paul Smith at 28/03/2024 - 07:36
The FPC’s ‘interest rate stress test’ Recommendation (withdrawn with effect from 1 August 2022) built on our rules and specified that lenders should assess whether borrowers could still afford their mortgage if, at any point over the first five years of the loan, mortgage rates were to be 3 percentage points higher than the contractual reversion rate. This recommendation was intended to be read together with the FCA requirements around considering the effect of likely future interest rate rises as set out in MCOB 11.6.18R(2).

Reply to the comment left by Paul Smith at 28/03/2024 - 07:36
Paul, very well explained. However I think landlords should also shoulder a good chunk of the blame. Many landlords were so highly geared that any ripple would cause them financial pain. When I borrowed £1.8m I bloody well had a plan B so that if rates went up (and they did) I would still be able to subsidise the loan repayments by borrowing from my other non property company. By all means have an interest only mortgage but don't sail close to the wind and factor in rate rises. It was bloody obvious that rates would rise at some point, trouble was many people thought it would only be a percent or less.

Reply to the comment left by GlanACC at 28/03/2024 - 08:32
GlanACC, a very good example of what the MMR set out to enforce in 2014. I too had seven figure borrowing taken pre crash and fully aware of potential risks as well as rewards. I wasn’t in the market for expansion in 2014 but remember thinking the rules would have simply prevented me getting above 4 properties if I was starting out then.

(Just to note in my extract of FPC recommendations above, the stress test of 3% isn’t above base rate which was negligible - it is 3% above contractual reversion which is the SVR. Look back at SVRs over the past decade, they are 4% or 5%. So the stress test was another 3% on top of that - giving 7% or 8%. Turned out to be reality and of course stress tests were never a cap or promise of anything).

Reply to the comment left by Keith Wellburn at 28/03/2024 - 08:45
To be honest when I borrowed that £1.8m it was well before the 2008 debacle. I honestly can't remember filling in any statements of expected rents or anything like that. Money was easy to get them and with house prices shooting up there was always plenty of equity to borrow against - hence my plan B. There used to be a forum called Housemouse in which I was an active poster, many of the 'investors' were being persuaded to buy properties, in particular off plan and new build flats, and the owner of the site Lady Lea Bevan eventually went bust (Google her). I met her a couple of times and very nice she was too but it was obvious her strategy wasn't going to work. It was the property equivalent of the Emperors New Clothes

Reply to the comment left by GlanACC at 28/03/2024 - 08:52
I was dealing direct with Mortgage Express at the time, it went something like this; me “I’m buying another one”. MX “Fill in the first page with the address and the last page with your signature and fax them across”

Reply to the comment left by Keith Wellburn at 28/03/2024 - 09:02
Funny that, so was I .. I got a 10 year fixed mortgage