There were 21,600 new buy-to-let loans advanced in the second quarter, a relatively modest 4% decline from 22,400 in the preceding three months. Heavily reliant on wholesale funding, the buy-to-let market has suffered a sharp contraction in the credit crunch. There are now fewer active lenders in the private rental market, with less money to lend. And therefore seven consecutive quarters of decline have left buy-to-let gross lending at very low levels.
The fall in advances in the second quarter was concentrated in remortgaging, down 15% on the preceding quarter, whereas the number of house purchase loans rose 5%. Lower reversion rates have reduced the incentive to remortgage when exiting fixed-rate deals, while diminished equity levels and tighter lending criteria have made it more difficult for those who may wish to remortgage.
By value, buy-to-let gross advances totalled £1.9 billion in the second quarter, which was 5.6% of total gross mortgage lending (compared with £8.9 billion in the second quarter of 2008, which was 11.9% of total gross mortgage lending). Buy-to-let now represents 11.5% of the total value of mortgages outstanding in the UK.
Buy-to-let arrears showed considerable improvement in all measures. There were 29,400 mortgages in arrears of three months or more (2.49% of all buy-to-let mortgages), down 17% from 35,600 (3.06%) in the previous quarter. And the number of mortgages in arrears of more than 1.5% of the balance outstanding fell 20% from 28,800 (2.47%) at the end of April to 22,900 (1.94%).
Lower interest rates are helping landlords to recover from arrears and as the majority of buy-to-let loans are on an interest-only basis, these loans will see a larger proportionate decline in monthly payments than repayment loans.
Lenders make extensive use of receivers to manage arrears in the buy-to-let sector rather than take possession, often because there are paying tenants in the property. This allows the tenants to remain in the property with the receiver collecting rent and passing it on to the lender to pay down any arrears. At the end of June there were 10,800 mortgages (0.91% of all buy-to-let mortgages) with a receiver in place, compared with 9,200 (0.79%) in the previous quarter and only 1,000 (0.09%) a year earlier.
The peak in buy-to-let arrears seems to have passed, with the number of loans more than three months in arrears including those with a receiver in place, falling 10% from the previous quarter to 40,200.
Around 1,400 buy-to-let mortgaged properties were taken into possession (0.12% of all buy-to-let mortgages); this was unchanged from the first quarter. And there were 2,500 receivers newly appointed in the quarter, down from 2,900 in the previous quarter.
CML senior policy adviser Rob Thomas said: “So long as properties have paying tenants, landlords now have much greater ability to service mortgage payments and we expect arrears to continue to fall as landlords are helped by lower interest rates. But healthy rental demand is contingent on a number of factors, including tenants’ continued employment.
“Whilst house price falls have limited the scope for some landlords to remortgage, there is no evidence that landlords are exiting the market in large numbers and some landlords have the opportunity to make acquisitions and take advantage of higher yields. But new lending to the buy-to-let market will continue to be constrained by the shortage of funding.”
Nigel Terrington, chief executive of The Paragon Group of Companies, commented: ‘Today’s arrears figures demonstrate the robust credit quality of buy-to-let lending and the strong performance of landlords, even in a recessionary environment. The overwhelming majority of landlords are experiencing growing levels of tenant demand for their properties, which is reflected in low void periods and healthy yield returns. Paragon’s own arrears level is significantly below that of both the buy-to-let and wider mortgage market.
‘However, in this environment landlords want to expand their portfolios but are being prevented from doing so by a lack of mortgage finance, as the CML’s depressed lending figures highlight. The buy-to-let market has traditionally been served by non-deposit taking financial institutions, but these lenders have found it difficult to write new business since the start of the credit crunch due to the closure of the wholesale funding markets. It is essential that the Government takes more action to enable the securitisation markets to recover to achieve a healthy and vibrant mortgage market.
‘If lending activity in the sector continues to be weak, there is a real danger that we could see a contraction in the number of properties in the private rented sector. This would be detrimental to the UK housing market and is likely to result in rental inflation and people being priced out of rented accommodation.’