Loans to value in a falling market
Posted by markharrison on April 16, 2008
There was a slightly odd article in yesterday’s Telegraph about this.
The summary of the article was that, if a lender is prepared to lend, say, 85% of the value of a property, and a property goes down in value, then when you remortgage, you may be able to borrow less than you borrowed last time, so have to top up the mortgage, rather than have the option of withdrawing more capital
Now, this is a valid point, as was their follow up that, because of this, there will be some forced sales.
However, to my mind, there were some critical points they missed:
- Investors don’t have to remortgage. It may well be that they find that the jump from a fixed-rate / discounted-rate to a standard-rate mortgage makes it work them doing so, even if they have to come up with some cash in the meantime, but no-one is seriously suggesting that lenders are going to demand extra capital injections from accounts that are paid in full each month (even if, in some cases, they might be entitled to.)
- Most investors coming to the end of their fixed- or discounted- rate mortgages took out those mortgages 2-3 years ago. That’s to say, in 2005-2006. In my experience, at that point, the 85% loan to value was seldom the “cap” on the mortgage – the rent coverage required was. Most lenders require that the rent coming in covers about 130% of the interest payments… and that typically enforced a lower lending limit than 85% of the market value might have done.
I’ve not seen any analysis of how the cap split is broken down, because lenders don’t release those figures – but around here, rents have gone up “a bit” in the last 2-3 years, and rates are about where they were, so the fall in loan-to-value caps isn’t going to be as dramatic as the Telegraph writer makes out.
Of course, there are parts of the country where yields were better 2-3 years ago, and in those parts of the country, the “LTV cap impact” of a fall will be more severe.
Likewise, there are going to be B2L investors who really borrowed up to the limit, and have no spare cash, and those people will be forced into a fire sale..
… but statistics about the numbers of B2L mortgages out there obscure the fact that the vast majority of landlords are either long-term landlords who know how to ride out a slump (I’m well within the LTV terms even if the property market falls 20%), or working professionals who may have to come up with an extra £100 in cash each month to bail out a floating-rate mortgage, but aren’t likely to sell up their “pension property” just because of that.
Of course, there’s also the upside – the few investors who do have to sell out at firesale prices are welcome to get in touch 🙂