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Are legacy mortgages to blame for short-term rental market?

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Landlords say buy-to-let lenders’ legacy books are behind an inflated number of short-term tenancies in the UK, despite the Council of Mortgage Lenders protesting its members are now offering longer-term lets.

Concerns are also being raised as to whether lenders’ historic terms are contributing to a trend for short-term tenancies, and, if so, what is the scale of the problem and what are the possible solutions?

The issue of lenders affecting tenancy periods was first raised in a House of Commons debate in December.

In the debate, Conservative MP and former property lawyer Will Quince said the CML played a part in blocking tenancies of more than one year in case they needed to sell the property quickly in the case of default.

Quince was backed up by local government minister Marcus Jones, who said: “That is one of the challenges for residential landlords, particularly buy-to-let landlords, who are restricted by the terms of a particular mortgage product they take.”

However, the CML refuted the claims earlier this month, saying the housing charity Shelter had found lenders responsible for more than half of England’s buy-to-let loan book had allowed landlords to offer tenancies of up to three years.

Delving into the back book

National Landlords Association head of policy Chris Norris says the CML has done a lot to help promote longer-term tenancy, but argues more should be done.

He says: “Five or six years ago it was a lot more restrictive and almost all lenders had a one-year limit on assured short-term tenancies. In the past few years, partly because of the efforts of the CML, these restrictions have been eased. Now most lenders set the maximum at 24 months, but they could go further.”

But he says the CML “may be overstating its case” because the newer flexible terms do not apply to legacy mortgages.

These loans commonly have clauses that restrict tenancy periods to a maximum of 12 months at a time. Norris argues that, because landlords want to save money, short tenancy periods are being needlessly perpetuated.

He says: “You will have a lot of landlords still sitting on mortgages that were issued pre-credit crunch and have very low rates such as lifetime trackers at 1 or 1.5 percentage points above base rate. They won’t give those up easily. Most lenders would love to see landlords move off those preferential rates.”

But the true scale of the issue is hard to estimate, as a CML spokesman says the trade body has never kept a breakdown of the relative volumes of different types of buy-to-let lending.

While the exact breakdown of different buy-to-let loan types is unknown, comments from lender bosses and the Prudential Regulation Authority’s new underwriting standards suggest the majority of buy-to-let lending has been fixed-rate since the 2008 financial crash.

Other types of lending, such as lifetime trackers, were sidelined by lenders due to low interest rates.

“You will have a lot of landlords still sitting on mortgages that were issued pre-credit crunch and have very low rates”

However, the majority of lenders’ legacy buy-to-let books will be lifetime trackers, according to Mortgages for Business managing director David Whittaker.

He says: “In terms of legacy mortgages, a high proportion are likely to be lifetime trackers because it makes sense for landlords not to dispose
of them.”

Lengthening the lets

Industry experts say there are several possible solutions to the issue of legacy buy-to-let loans with restrictions on tenancy length.

The first is for lenders to waive their rules around short tenancy periods.

Whittaker says: “If you were with a lender whose documentation 10 years ago was somewhat different, but they are lending today, their view probably today would be ‘we know what we said in the mortgage offer at the time, but we are now broad-minded about the type of tenancy we allow you to have. So we wouldn’t penalise you today if you didn’t have an assured shorthold tenancy because our current policy today is to allow arrangements of up to three or five years’.”

Landlord group Property 118 founder Mark Alexander says another solution to the problem of short tenancies is a deed of assurance contract between landlord and lender. However, he says these are still relatively rare.

He says: “That means I still give you a six-month assured shorthold tenancy, so I’m not in any breach of mortgage conditions. I can still evict the tenant if they breach the mortgage conditions, and I keep my word to my tenants, who can leave whenever they want.”

A third, and more controversial, solution would be for landlords and tenants to ignore any rules on ten-ancy length imposed by lenders.

Even if lenders do not waive the restrictive clauses in legacy mortgage contracts, these are almost never checked, according to one lender executive who wished to remain anonymous.

He says: “How will a lender know if a borrower has a three-year tenancy agreement? The answer is you wouldn’t, unless you actually took the property into possession when the borrower defaults.”

The Government published its long-awaited Housing White Paper yesterday. For all the coverage from our sister title Mortgage Strategy, click here.

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