Despite the good news announced yesterday about interest rate cuts, Landlords that are defaulting on their mortgages are forcing UK Banks and Buy-to-Let Mortgage Lenders to consider alternative options to repossession sales.
Traditionally, if a home owner or investor defaulted on their mortgage, the lending Bank would repossess the property, instruct a ‘Receiver of Rent’ to manage the tenancy out, and then engage with a local Estate Agent to sell the property on the open market in order to minimise any further financial loss on the loan. The selling Agent would usually be given a maximum of 6 - 8 weeks to find a buyer for the property and if they were unsuccessful, the Bank would then put the house up for auction to be snapped up by another budding investor buyer!
Although the Banks were forced to accept a lower sale price on the property, it was the strength of rising house prices that would support any lower offers accepted which effectively, caused an ‘acceptable’ difference between the sale price and the true value of the property.
However, as of the last 6 – 12 months, house prices have continued to fall and selling property at auction has become a definite ‘last resort’.
The fall in house prices and the increase on cost of living has had a knock-on-effect on repossessions as more and more home owners fall into negative equity. The number of properties repossessed by mortgage lenders in the UK has risen by 48% in the past year.
The Council of Mortgage Lenders (CML) said there were 18,900 repossessions in the six months to June, up from 12,800 in the same period last year.
Nowadays, if a Bank is to repossess a property and try and sell it on the open market, they could expect to achieve a selling price of at least 20% - 30% under market value leaving a massive deficit on the original loan. Great news for the prospective investment purchasers looking to ‘fill their boots’ with bargain investment deals (if they can secure a mortgage that is) however, a major headache for the Lenders – hence, a shift in pattern is forming.
Buy-to-let Lenders will now face the task of becoming Landlords themselves.
As a Landlord defaults on the mortgage, the Lender will appoint the receiver of rent, in this case, this will be the Lender itself and the ‘in-house’ Property Management Department will then manage the tenancy throughout its fixed term period. The Lender will assume the role of the Landlord and fulfill any obligations set out in the original tenancy agreement. At the end of the fixed term, instead of repossessing the property and selling it on the open market
, it will be in the Banks best interest to maintain a tenancy or find new tenants and ride out the next 12 – 18 months or at least until the housing market finds it feet again.
, it will be in the Banks best interest to maintain a tenancy or find new tenants and ride out the next 12 – 18 months or at least until the housing market finds it feet again.
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