New Build Buy To Let Mortgages
The decision by a few buy to let mortgage lenders to pull out of buy-to-let (BTL) new build does not appear to have begun any great trends among lenders. One buy to let mortgage lender says that it has tightened up its lending criteria on such properties as a direct result. However, at least three of the 10 biggest Buy to let mortgage lenders say that they have no intention of halting lending on new builds.
One buy to let lender will only accept applications on properties over a year old, due to an oversupply of newly built property. With the housing market cooling, property developers are finding that interest is way below what was anticipated. They are looking to shift some of their stock without spoiling the market value of the entire development. The worst hit are the new build properties that are typically two-bedroom, two bathroom apartments, in provincial city centres, such as Leeds, Newcastle, Nottingham and Docklands. Developers with excess housing stock on their hands are being approached by large investment and Property Buying clubs.
The problem is, if the valuation is carried out based on the full price, the lender lends on that basis and the property is effectively under secured. It is a win for the developer and the buyer. The developer has sold a chunk of the development without prejudicing the perceived price, while the buyer has secured the flat at a discount. Any prospective buyer who comes along for the remaining flats is told that others have sold for the full asking price and therefore feels that they must be worth that much. The valuation is based on the selling price listed in Land Registry. It is virtually impossible to know whether it really is the genuine price. Problems are likely to come to light only when the market stops rising. Developments are predicated on continually spiralling prices, but with the slowdown in prices, the right valuation becomes more important. Supply always chases demand off a cliff. That's the nature of the market.
The risk is that the real market value of the property is hidden. If there are discounts and incentives involved, and there often are on this type of property, of which the lender is unaware, it may end up lending in excess of its normal maximum. Ultimately, if prices fall, that can lead to negative equity-where the mortgage is more than the value of the property. On top of that, any realistic rental is likely to be based on the true market value, so there may be difficulty generating sufficient rental income to cover the mortgage. In the current market buying new build properties off plan represents a high risk, high reward strategy, investors who purchase off plan property are vulnerable to low resale value because of oversupply and valuations that could be inaccurate by as much as 10%.
Another danger is investor flooding, whereby all the properties in a development become available at the same time, leaving landlords with identical properties competing for a limited number of tenants.
A Top 10 BTL lender acknowledges that new build valuations can be an issue, but feels that things are under control. Where builders incorporate discounts most lenders are aware of the fact and will adjust lending criteria accordingly.
A survey of Buy To Let Mortgage lenders at the Council Mortgage Lenders suggested that less than 5% of all Buy to let was new build and that only 3% was new build flats.