The recent news that mortgage lenders are cracking down on residential customers who let out their homes to paying tenants without consent (referred to in the Telegraph, perhaps inaccurately, as ‘accidental landlords’) begs the question: have we really learned our lesson when it comes to mortgage fraud?
The buy to let market in the UK is something of a contrast to the rest of Europe, where investment in rental property is largely institutionalised. Accidental landlords – so called because their circumstances force them to let out, rather than sell, their homes – are thought to make up some 30% of the UK rental market. However, lenders are suspicious that thousands of customers might be doing so without their knowledge in order to avoid higher interest rates.
The misappropriation of mortgages works the other way, too. A recent Dispatches exposé, which focused on the dirty tactics employed by estate agents to cajole customers into using in-house mortgage providers, saw one agent recommend a buy to let mortgage to a customer whose employment history had resulted in the rejection of their residential application.
If anything, this highlights the problems of an industry which is notorious, at least in one aspect, for a high-pressure, target-based environment and short-term focus. It’s damning, unprofessional, and ultimately counterproductive to the overall health of the housing market.
We saw the misuse of mortgages before and during the financial crisis with one product that is now consigned to financial history; the self-cert mortgage. Able to declare their own income without the need for proof, buyers were spurred on to inadvisable excesses of fiction by the pressures of a highly competitive seller’s market. The resulting imbalance of purchasing power pushed up prices, so when the inevitable defaults on unaffordable debt began building up, many self-cert borrowers were unable to sell.
As there is no minimum income requirement for most buy to let mortgages, the only limiting factor is the amount of rent that the property could fetch; meaning that they, too, boost the purchasing power of fraudulent applicants to disproportionate levels. Buy to let is also a commercial investment, meaning that lenders will find it easier to repossess the property.
On the flipside, people renting their property under a residential mortgage could face financial penalties; they may have to pay a loaded interest rate backdated across past repayments or a ‘consent to let’ premium. Their lender might even demand full repayment of the mortgage, which will likely mean a default on the loan. As hard as loaded repayments and repossessions are from an investment perspective, consider that this will also spell disaster for any unfortunate tenants the customer has in situ.
When the housing market begins to gather pace following a lull, things can become a bit of a free-for-all. Property is an illiquid asset and it will be some time before supply rises to meet the new demand. Until then, many people will use what tricks are available to them to supplant their competition.
It isn’t enough that the market is improving – it needs to be improving in the right manner, and at the right pace. Prices in London – as always, a desirable and furiously contested property hot-spot – rose by an average of 2% per month during Q3, and are perilously close (many believe) to tipping-point.
The government’s recent efforts to bolster purchasing activity and access to finance – spearheaded by the Funding for Lending Scheme and, more recently, by the Help to Buy mortgage guarantee – can only work in a fluid and sustainable market. The fact that buy to let mortgages do not fall under the remit of the FCA establishes a definitive boundary between them and residential mortgages; one which customers might find impenetrable.
I welcome lenders’ newfound attention to addressing mortgage fraud – but I would also welcome a more transparent process to obtain consent to let, one not as fraught with administrative and financial obstacles, in order that the thousands of ‘accidental’ landlords in the UK are not quite so tempted towards it. I would welcome greater attention to the aggressive practices of certain estate agents and buyers who inflate the market for short-term gain. I would welcome more flexible buy to let lending to allow landlords to cater to the ever-widening and ever-diversifying rental demographic, and I would welcome most of all the government’s realisation that stoking the fire is not enough – you need to open the flue as well.