Buy-to-let Mortgage Arrears: Understanding the factors that influence landlords’ mortgage debt Alison Wallace and Julie Rugg Centre for Housing Policy Spring 2014 About the University of York York has become one of the top ten universities in the UK for teaching and research. In the Times Higher Education world rankings of universities less than 50 years old it is first in the UK and seventh in the world. There are now over 30 academic departments and research centres and the student body has expanded to nearly 16,000. Virtually all our research is “internationally recognised” and over 50% is “world-leading” or “internationally excellent” (Research Assessment Exercise 2008). The University of York is consistently a top 10 UK research university and attracted over £200 million of funding in the academic year 2011/12. The University works with public, private and third sector organisations across its research activities. About the Centre for Housing Policy The Centre for Housing Policy at the University of York has a twenty-year record of academically excellent and policy-relevant research, with measurable impacts on policy and services. Researchers have internationally recognised expertise across the full range of housing issues, and skills from analysis of large-scale data sets to interviewing vulnerable people. The Centre undertakes independent, evidence based research for Government departments, charities, and private sector organisations. For further information about CHP see www.york.ac.uk/chp About the authors Alison Wallace is a Research Fellow and joined the Centre for Housing Policy at the University of York in 2001. Her expertise is in homeownership and housing markets and, prior to joining academia, she worked as a social housing practitioner in London. Julie Rugg is a Senior Research Fellow and joined the Centre for Housing Policy in January 1993. She has completed work including qualitative research on welfare and its impact on claimant and landlord behaviour, aspects of the private rented sector and young people’s housing biographies. © Lloyds Banking Group 2 About Lloyds Banking Group Our vision To be the best bank for customers. Becoming the best bank for customers means being the best bank for businesses, for shareholders, for our people and for our communities. Our strategy We will put our customers at the heart of everything we do. We are already re-shaping our business so that by working together we can focus all our future decisions around our customers. The investment the Group is making is considerable and will have far reaching benefits in expanding products and capabilities for our customers – including finding new and innovative ways to help homebuyers. As a result, we are very pleased to be supporting research in this area. The recently announced Helping Britain Prosper Plan is designed to make a visible difference for all our customers and within our communities. Our brands The Group operates the UK’s largest retail bank and has a large and diverse customer base. Services are offered through a number of recognised brands including Lloyds Bank, Halifax, Bank of Scotland, BM Solutions and Scottish Widows, as well as a range of distribution channels including the largest branch network in the UK. BM Solutions is one of the market-leading specialist lenders providing support to the buy to let sector. Our main aim at BM Solutions is to provide awardwinning service, forward-thinking technology and competitive products. Helping homebuyers As the leading lender to homebuyers across the country, the private rental sector is a core focus for Lloyds Banking Group. In addition, we helped more than 80,000 first time buyers to purchase their first home, advancing mortgages totalling over £9.7 billion to these buyers during 2013. Through our participation in government schemes such as Help to Buy we are providing strong support for the recovery in the housing market, by facilitating access to mortgage financing for creditworthy home buyers at up to 95 per cent of property purchase values. Find out more Please email [email protected] or call 020 7356 2189 and we will be pleased to tell you more about our work. 3 Acknowledgements The research team would like to thank the people who helped us by providing research contacts, data and access to landlords: Mark Alexander, property118.com; Vanessa Warwick, propertytribes.com; Tom Entwhistle, landlordzone.co.uk; Wendy Alcock, moneysavingexpert.com; Mark Long, BDRC Continental; Julie Norris, Bristol City Council; Vicky Watts, Sunderland City Council; and Jennifer Marlew, Wigan Council. We are very grateful to all of the lenders, landlords and their advocate organisations who gave time to talk to us about their experiences and perceptions of the buy-to-let market and landlord mortgage debt within it. David Rhodes at the Centre for Housing Policy provided assistance with the quantitative analysis, and Nicola Moody and Atholynne Lonsdale at the Centre helped prepare the report and provided office support. Lloyds Banking Group commissioned the report and we would like to acknowledge the support and contribution made by Michael Vennard and his colleagues; and of Kate Webb and her colleagues at Shelter for comments on an earlier draft. The cover photo is licensed for use by the Press Association. 4 Contents About the University of York ........................................................... 2 About the Centre for Housing Policy ................................................ 2 About the authors .......................................................................... 2 About Lloyds Banking Group .......................................................... 3 Acknowledgements ........................................................................ 4 Forewords..................................................................................... 6 Executive Summary ........................................................................ 9 1: Introduction ............................................................................. 11 2: Buy-to-let and landlords’ finances ............................................. 13 3: Evidence from the English Housing Survey Private Sector Landlords Survey 2010 .................................................. 27 4: Lender Loan Book Data Analysis ............................................... 47 5: Landlords and lenders’ experiences of buy-to-let mortgage arrears .................................................................... 65 6: Summary, discussion and conclusions ........................................ 87 References .................................................................................. 91 Appendix 1: Research Methods .................................................... 95 Appendix 2: Landlord Topic Guide ................................................ 97 Appendix 3: Lender Topic Guide ..................................................101 5 Forewords Lloyds Banking Group Lloyds Banking Group is one of the biggest providers of Buy-to-Let mortgage finance in the UK, primarily through the Birmingham Midshires brand. Buy-to-Let mortgages have been available for nearly 20 years, and as demand for private rented property grows, deeper understanding of the market is becoming ever more important. To aid this understanding we have commissioned this report, in partnership with Shelter, because there is little research available specifically exploring the issues that cause landlords to default on their mortgage. There are clear lessons within this research for landlords, legislators and lenders that can be used to improve the private rental sector for all. Potential landlords need to understand their market and treat the letting proposition as a business. For the best chance of being successful, they should have a clear business plan and ensure they have enough resources to cover events that cause financial stress – such as repairs and voids. Legislators must review the obstacles preventing Landlords from getting their property back where rent isn’t being paid. Small scale landlords often do not have large reserves to draw upon in order to pay for mortgage payments and maintenance when a tenant stops paying the rent. A balance clearly needs to be struck to ensure rogue landlords don’t abuse the system, but faster court processes to enable landlords to evict non-paying tenants are needed before landlords will risk entering into longer-term tenancies that some tenants want. Finally the report helps answer some of the questions lenders will have when called upon to look at lending policies. It clearly demonstrates that tenant circumstances alone rarely cause landlords to default. In fact, it shows most make as much effort as owner-occupiers to keep their hard-earned property, often subsidising payments from other income. Lenders can help by engaging with Landlords, Government and organisations like Shelter in order to ensure mortgage conditions and processes support a strong and vibrant private rental sector whilst still delivering the risk mitigation required. At Lloyds Banking Group we recognise our customers are both landlords and tenants, and believe this research provides some of the answers to help us deliver Buy to Let mortgages that are appropriate for the changing market for private rental properties. Stephen Noakes Home & Lifestyle Director Lloyds Banking Group 6 Shelter Spiralling house prices and the shortage of social housing means that private renting is increasingly the only option for low