The sums don't add up for landlords!

A buy-to-let mortgage crisis looms if tenants can't pay

Arrears and repossessions were a huge problem in the midst of the credit crunch, particularly in the buy-to-let sector where arrears peaked at over 3% of all mortgages in the early part of 2009.

Many landlords were struggling to meet their monthly mortgage commitments last year and a large number are still finding it hard to balance the books.

It’s not high mortgage payments that are causing the problem. Landlords have benefitted from record low interest rates in the same way as residential borrowers (though some are stuck on high fixed rates or relatively high SVRS).

No, the biggest problem facing beleaguered landlords is the fact that their tenants have money worries, and if they can’t pay, it inevitably affects the landlord's ability to meet their own mortgage.

You might be able to meet your buy-to-let commitments for a few months, but ultimately your tenant’s rental arrears could quickly turn into your mortgage arrears.

But just how big is this problem for landlords?

Can’t pay, won’t pay

Risk of rate rises

The current low interest rate environment is helping many landlords cover their mortgage commitments despite these rental arrears, but many are just scraping by. And there’s a massive looming risk that a large number will be unable to meet their monthly repayments when interest rates inevitably rise.

John Fitzsimons highlights three things to consider if you’re planning a buy-to-let investment

Website spareroom.co.uk says that one in four landlords have admitted that rents from tenants are barely covering their mortgage repayments, meaning a hike in interest rates could spell disaster.

A whopping 43% said that rental income would no longer cover their mortgage if rates were to rise by 2%, while 22% said just a 1% increase in mortgage rates would tip them over the edge.

The most worrying is the 10% of landlords who reckon that interest rates would only need to inch up by 0.5% for their rental income to no longer cover their mortgage repayments, sending them into mortgage arrears.

One answer is to increase rents but with tenant arrears clearly still a problem many landlords will be unable to increase their income in that way.

Another option is to decrease your mortgage payments by moving to a better deal, something that has been extremely difficult in the last two years with lenders’ criteria extremely tight. But it is possible if you have 20% equity in your property, as the tables below show.

Plus, it’s not all doom and gloom in the buy-to-let sector with demand from tenants stronger than ever.

Blue skies ahead?

Indeed, nearly three times as many landlords reported that tenant demand was rising rather than falling during the second quarter of this year, according to Paragon Mortgages. In fact demand has been rising consistently for the last two years.

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Looking ahead landlords are even more positive, expecting tenant demand to strengthen considerably. Over a third of landlords (35%) expect demand to be higher in 12 months, with just 8% forecasting a decline.

At the same time there is a massive dearth in available rental properties, according to the Association of Residential Lettings Agents (ARLA), meaning demand is significantly outstripping supply.

Almost three quarters (70%) of ARLA members say that there are more tenants than available properties -- a massive increase from just 24% in September 2009.

This is good news for landlords who may be able to command higher rents, assuming their tenants can afford to pay them. But it’s bad news for tenants who will find it more and more difficult to find affordable rental accommodation. In fact ARLA reckons that a severe rental housing shortage is more likely than ever.

One of the reasons for this shortage is the lack of available mortgage finance preventing many landlords from expanding their portfolios. But there are some competitive buy-to-let deals available if you meet the tight lending criteria, and below are some of the best:

12 terrific trackers

LENDER	TYPE OF DEAL	RATE	FEE	MAX LTV
Principality BS	2-year tracker	3.64% (Base + 3.14)	3.5%	60%
Bank of China	Term tracker	3.88% (Base + 3.38)	£1,695	65%
The Mortgage Works	2-year tracker	3.79% (Base + 3.29)	3.5%	60%
BM Solutions	2-year tracker	4.10% (Base + 3.60)	3%	60%
The Mortgage Works	2-year tracker	4.14% (Base + 3.64)	3.5%	70%
Nottingham BS	2-year tracker	4.59% (Base + 4.09)	£995	75%
Halifax	2-year tracker	4.79% (Base + 4.29)	1.25%	75%
BM Solutions	2-year tracker	4.85% (Base + 4.35)	£999	60%
BM Solutions	2-year tracker	4.95% (Base + 4.45)	£2,249	75%
Aldermore Mortgages	2-year discount	4.98% (Base + 4.48)	1.25%	65%
NatWest	2-year tracker	4.99% (Base + 4.49)	£1,999	75%
BM Solutions	2-year tracker	5.40% (Base + 4.90)	1.5%	75%

18 amazing fixed rates

LENDER	TYPE OF DEAL	RATE	FEE	MAX LTV
Leek United BS	2-year fix	4.58%	£995	60%
Leeds BS	2-year fix	4.89%	£999	60%
The Mortgage Works	2-year fix	4.99%	3.5%	70%
BM Solutions	2-year fix	5.20%	2.5%	70%
Nottingham BS	3-year fix	5.29%	£1,495	75%
BM Solutions	2-year fix	5.40%	2.5%	75%
The Mortgage Works	2-year fix	5.49%	2.5%	70%
The Mortgage Works	3-year fix	5.49%	3%	80%
Post Office	3-year fix	5.59%	£999	60%
The Mortgage Works	2-year fix	5.64%	2.5%	75%
Halifax	2-year fix	5.69%	1.25%	75%
Leeds BS	5-year fix	5.69%	£1,549	60%
The Mortgage Works	2-year fix	5.79%	2.5%	80%
Aldermore Mortgages	3-year fix	5.78%	2.5%	75%
Post Office	3-year fix	5.89%	£999	75%
Aldermore Mortgages	5-year fix	5.93%	2.25%	75%
Post Office	5-year fix	5.99%	£999	60%
Post Office	5-year fix	6.49%	£999	75%

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