- Personal Finance
Being a buy to let landlord in the recession
The recession has been harsh on buy to let landlords who have mortgages. Rents have been falling as reposessions and unemployed homeowners trying to rent their homes out rather than sell in a falling market, increase the supply of rentals on offer.
In addition, most buy-to-let mortgages have a clause in them which allows the lender to demand a lump sum payment to eliminate any negative equity that might have arisen due to falling house prices. Because many buy to let landlords have interest-only mortgages, they are particularly vulnerable to negative equity caused by falling house prices.
To add to landlords' woes, because of the Credit Crunch, the number of lenders on the market who will consider a buy to let remortgage has reduced sharply as some cautious banks have pulled out of the sector altogether. The remaining lenders are applying stiff fees on any loans they agree.
What to do
The main priority for buy to let landlords is to be able to ride out the recession with their portfolio intact. Surviving the recession is all about managing risk. House prices will eventually rise again, though it may take a decade, and you can end up making a good profit, provided you have survived the recession without any of your homes being repossessed. Here is what to do:
1. First check to see if your buy-to-let home is in negative equity. The easiest way to do this is to get an estate agent to value the property for you and you can then compare the valuation to the amount of the mortgage you have outstanding. You can also use the Financial Times mortgage equity calculator to check the equity in your properties. If your mortgage is greater than the value of the house you are in negative equity.
2. Many buy-to-let mortgages have a clause within that allows the lender to demand a lump sum if the mortgage is greater than the value of the house. If you are in a negative equity situation, don't wait for your lender to contact you to demand a lump sum payment. Start overpaying the mortgage if the terms and conditions of your loan allow it. It's easier to get your loan down by making small regular monthly payments than to have to find a lump sum in a hurry when your lender demands it. If you are lucky enough to be on a variable rate mortgage, your interest payments will have come down sharply, which means your profit (rental income less interest payments) will have gone up. Use some of this profit to overpay the mortgage so that you are never in a negative equity situation even as house prices continue to fall. Keep some of the money aside to build up a deposit so that you have firepower to hand should you wish to take advantage of falling house prices to expand your portfolio.
3. If you are currently on a fixed rate deal, it's probably best to stick to it and switch to the lender's standard variable rate when the deal expires, rather than trying to remortgage, as the fees on buy-to-let remortgages are exorbitant. If your contract allows you to overpay without penalty, do so to reduce your risks.
4. Be careful of voids. The main reason buy to let landlords get into trouble is because they have voids. Try to ensure your property is let by cutting the rent rather than letting the property remain empty. It is better to receive some rental money than nothing at all. Even if you are in a void period, don't be tempted to save money by letting your buy to let insurance lapse. You will need it when the property is let again.
5. Finally recessions are periods of immense opportunity for those landlords who have managed their risks well, as it is a buyers market. This is exactly the time to snap up good properties at competitive prices in good locations. However, because it is hard to get a buy to let mortgage in the current climate, the only landlords who can take advantage are cash buyers. Therefore use the profits delivered from low interest rates to build up a lump sum that you can use to buy property at knockdown rates at auctions.
Most housing recessions last at least 10 years, and are followed by a huge boom lasting another decade. Therefore the opportunity to expand your property portfolio at cheap prices may not present itself again for at least two decades.