By Stephen Knight, Executive Chairman Checkmate Mortgages

  

 

When Buy To Let (BTL) first appeared in the UK mortgage market it was regarded as a highly niche, commercial product requiring higher rates, lower LTVs and delivering greater risk than prime residential.  Wrong.  Take a look at this graph:

 

 

 

 

In every example, except the second half of 2008 (where a large part of the increase is technical), arrears on BTL let has beaten prime residential.  Yet commentators continue to talk negatively about BTL. 

 

Those of us involved in the BTL market soon began to realise that investors’ BTL portfolios were their future pension that they were not prepared to put at risk.  A well organised BTL borrower expected some voids and in many ways was better equipped that the prime residential borrower to overcome financial problems as there were several sources of income.

 

I also query the evidence when commentators say that tenants are more likely to be in lower paid jobs meaning that BTL borrowers will suffer more as the recession continues.  Research I was involved in a few years back indicated that renting amongst young professionals was the preferred tenure until settling down beckoned in their 30s.  They wanted to live a little, pay off their student debt and be near their social centre.  This idea that homeowners are somehow superior to tenants in a way that is material to the economy, should only be written down with a quill pen.

 

Neither do I think that there is an “Aha” moment in the fact that BTL arrears marginally increased above prime residential in H2 2008.  The liquidity freeze has disproportionately affected BTL as the products have dried up, meaning that the book of outstanding loans is increasingly static, thereby distorting the arrears figures.

 

Whilst commentators are often all too happy to try and focus on the perceived negatives of BTL, the positive impact this product has had in the wider economy is often over looked. Whilst owning has many positives it is not conducive to social mobility. Before the introduction of assured shorthold tenancies and subsequently BTL, anyone who needed to re-locate, work temporarily in a new location or who simply didn’t yet want to buy would have found renting difficult due to a lack of suitable properties and also very expensive. In many instances people were ‘forced’ into buying simply as the alternative was too unpalatable. BTL has meant a fall in overall owner occupation rates from 70.9% in 2003 to 68.3%  in 2008 but provided genuine choice for people. Owning may provide people with a ‘stake in society’ but a thriving BTL sector gives consumers greater choice about when and if they make that choice.  

 

One mainstay of the old-fashioned approach to BTL underwriting is to rely on rental cover of 125% or 130%.  Actually, it was never ‘cover’ in the sense of offering the lender any real protection.  It was some young surveyor’s best guess as to the rent that could be achieved (which might be materially wrong) if the property could be let (which might not happen, at least straightaway) subject to market conditions (which the surveyor will claim indemnifies him for any aspect of his advice).

 

I always preferred underwriting the borrower and assessing his attitude to credit and ability to pay rather than pretend that I had “rental cover”, and recent events speak more to my theory because rental cover has never been better yet BTL arrears have increased.   Because rents have stayed steady, but interest rates have fallen dramatically, some BTL borrowers have 150% + rental cover, but that does not appear to have helped.  I say that’s because alleged rental cover is not that significant for underwriting purposes.

 

When markets make dramatic adjustments the baby sometimes get thrown out with the bath water.  I hope that this doesn’t happen to BTL and that we can soon get back to a wide availability of this important product, de-bunking those myths along the way.