Property investors at the point of no return 2018

Property investors are suffering from financial crisis because they have borrowed too much to build a buy to let portfolio too quickly – leaving them exposed if interest rates go up.

Many landlords are only surviving now because of an unholy alliance of the Bank of England and buy to let mortgage lenders.

The Bank offered a lifeline to landlords by cutting interest rates to 0.5% and leaving them there, taking the pressure off property investors who have to fund multiple mortgages that are leveraged at a high loan-to-value.

Mortgage lenders are only too happy to take a lenient view on payments, with many offering repayment holidays and carrying arrears because they don’t want to spark a mass return of keys and repossessions.

The problem is mortgage lenders encouraged property investors to buy, buy, buy without regard to the consequences.

Those consequences are that anyone with 85% loan-to-value borrowings three or four years ago probably has a property on par with the outstanding mortgage debt if it’s not in negative equity.

The unpalatable solution for many landlords is too bite the bullet and ditch these poor performing assets that could threaten to bring down the rest of the portfolio.

Assume a house cost £180,000 in three years ago at 85% LTV – a mortgage of £153,000.

A quick estimate of the current value is to take off 25% and add 13% - that’s subtract £45,000 to leave £135,000 and add £17,550 to leave £152,550. Take in to account selling costs and realistically, any rental income is just covering the mortgage and running costs.

Now consider when that property is going to reach a sale price to make continued investment worthwhile.

Even if house prices rise at 10% a year for the next two or three years, the value is only going to be about the original purchase price.

Any landlord unlucky enough to have recently started a 12 month assured shorthold tenancy agreement is stuck with no way of selling the property until two months from the end of the agreement in the best part of a year’s time – and even then is selling with sitting tenants.

Factor in increased interest rates – say they rise to 1.5% by the end of this year, that’s a massive increase that cuts any rental profit and may put an overstretched landlord in the position of having to input finance to the investment from personal funds.

The stark reality is the landlord can‘t sell, can’t pay the mortgage and risks financial disaster.

Buy to let investment seems to have reached the point of no return.