Buy-to-let: A legal minefield

Buy-to-let: A legal minefield


With all the indicators suggesting that the buy-to-let market is set to either boom or buoy, legal minds advise intermediaries and lenders alike to watch their step before jumping into this potentially hazardous market.

2010’s mortgage market ended on a positive note, with activity surpassing 2009 figures. According to research by Connells Survey and Valuation, increased demand in the buy-to-let market contributed to the promising figures.

Paul Staley, Corporate Services Director of Connells Survey and Valuation, said: “The valuations market has been bolstered by continued growth in buy-to-let investment. More attractive buy-to-let products are entering the mortgage market, and one in seven of our valuations now are for prospective landlords looking to take advantage of improving yields and fast rising rents in the private rental sector.”

The Increased demand and interest that we are seeing in the buy-to-let arena has been, to some extent, caused by the effects of the recession. Most notably we have seen an increase in the number of one-person households, a smaller social housing sector and more problems for first-time buyers. All of these factors mean that there are more people choosing to rent rather than buy.

But surprisingly, lenders are not too keen to offer their funds to this market. Nationwide Building Society subsidiary, The Mortgage Works (TMW), and BM Solutions are the dominant players in the market and all are experiencing a distinct lack of competition.

A smaller lender specializing in buy-to-let, Paragon Mortgages (Paragon), continues to note a significant increase in demand from borrowers and intermediaries, which is not matched by any rapid increase in the number of lenders.

Michael Clark, PR manager of Paragon, said: “Although the number of lenders competing in the buy-to-let market has improved over the past 12 months, there are still significantly fewer lenders than at the market’s peak in 2007.”

The wariness of lenders may be due to the legal difficulties involved at almost every step of the buy-to-let process.

Fraser Sinclair, Partner at Pure Law LLP, explained that incorrectly drafted tenancy agreements and failure to register homes in multiple occupancy (HMO), are the most common sources of legal issues for the inexperienced borrower because different registration procedures and forms apply to different types of properties.

In addition, “Lenders approach the financial calculations slightly differently with buy to let mortgages and their main assessment is whether the rental income adequately covers the anticipated mortgage repayments. Many lenders work on a rental coverage of at least 115- 125% of the mortgage payments,” he said.

From the broker’s point of view, buy-to-let is not particularly hazardous legally, “provided the broker has a sound understanding of residential tenancies and the extra financial information required by lenders.”

However, these ‘extra financial requirements’ are often difficult to meet in the current market, and can leave the investor with a deal that is not what they had hoped for.

Lucy Barrett, Director of Buckinghamshire packager W&B mortgage solutions, said: “The generous lending terms offered historically- such as same day remortgaging- leaves investors with a certain expectation which has been hard to manage. This has led to an increase in activities of property clubs which, in turn, have caused legal headaches with no money down, sale and rentback and general below market value deals becoming more and more exposed to the lenders.”

It seems that lawyers, lenders and intermediaries in the field agree: the increased demand from potential investors in the buy-to-let market is no cause for over-excitement. There are many legal issues associated in the lending process and extra financial requirements which means there is less scope for profit. Consequently, any real buy-to-let ‘boom’ will probably not surface until the UK pulls itself firmly out of the economic dip.

 “Key problems in the BTL market are reflective of current lean times and lack of originations, but exaggerated by the need for investors to frequently service their existing portfolios by buying and borrowing further to remedy voids in their stock. This is seen keenly in some of the high profile failures in the last 36 months but to a lesser degree amongst those landlords holding 2-5 properties,” said Lucy Barrett.

“The demand for BTL products is there, and as competition increases again the market will begin to expand, but I think it will be a slow process.”

By Katie-Jill Rowland 

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