Another Blow to British Buy to Let Landlords

The over valued, over leveraged buy-to-let property market in the UK is now coming to terms with a new reality. The lenders had written clauses into many buy-to-let mortgages which insist on a certain level of equity being held in a property, and most buy to let mortgages taken out in the last few years are now falling below that ratio. Terms vary, but several banks have already exercised their right to insist on a capital injection from the borrower, as property prices in Britain continue to decline.

According to the Financial Times, Charles McDowell, a prime property consultant in London, told the Financial Times that lenders had asked a number of his clients with large buy-to-let property portfolios to come up with more cash after falling prices slashed the level of their equity. NatWest had asked the owner of a £5m property portfolio in London to hand over £1m in a month to compensate for a 20 per cent drop in value, even though there was no evidence the client was likely to default on the loan.

“This client has sufficient capital to pay if NatWest goes ahead,” said Mr McDowell. “But both the client and I are astonished and dismayed at the bank’s actions, particularly as the rental income on the property far exceeds the interest payments [on the mortgage].”

While not commenting on the case directly, NatWest said policy allowed it to review its agreements with borrowers if rental income on a property was not enough to allow the customer to service a loan.

Savills Private Finance, the mortgage broker, has seen evidence of banks unexpectedly demanding cash from clients, typically those with high-value, highly geared property portfolios.

Melanie Bien, director of Savills, said this was a new trend as the buy-to-let market was not established in the previous market downturn in the early 1990s. “It is really a feature of the buy-to-let boom and credit crunch.”

The banks’ requests have come as lenders start exercising little-known clauses that allow them to demand additional funds if the owner’s equity shrinks in relation to the value of the property.

Plummeting property prices mean landlords who paid little notice to these hidden clauses when the market was booming are falling foul of the rules.

HFM Columbus, another broker, said HSBC Private Bank had warned a customer with a £10m property portfolio that she might have to come up with more cash. The property had not fallen much in value so she did not have to make the payment.

HSBC said that its loan terms generally included a maximum loan-to-value percentage. If these were exceeded “we are likely to require that the position is brought back within covenant”. Article

Nothing really new here – if anyone is still under the delusion that the banks are interested in anything other than lining the pockets of the senior staff, no doubt another 25% drop in property values will see most buy to let properties belonging to the government through the banks. Can anyone say “Fascism”?