Written evidence submitted by the Residential
1. ABOUT THE
The RLA is one of the two major national landlords
associations operating in England and Wales. We are a national
members organisation which represent landlords (and some agents)
who own/let out residential accommodation in the private rented
sector. Our members rent out their properties to families, working
people, young professionals, students, the elderly, benefit claimants
etc. We have over 7,500 subscribers with approaching 13,000 members.
Our members own/control over 100,000 units of accommodation. Although
Northern based, we have members throughout the country.
2. THE IMPORTANCE
The PRS is capital intensive. Many landlords
are dependent, to a greater or lesser extent, on mortgage finance.
Much new capital was brought into the private sector through buy
to let mortgages rather than institutional investment. This has
allowed the PRS to expand so that it now comprises nearly 15%
the overall housing market. The Government has supported an expanding
PRS. Whilst for some renting is a matter of necessity because
they cannot afford to buy, it is increasingly becoming a tenure
of choice. It is the easiest way for people to get onto the housing
ladder. It is the one tenure where there is ease of access. Importantly,
increasingly, the PRS is an intermediate sector providing affordable
housing for those who cannot access the social sector and are
unable to afford/choose not to live in the owner/occupier sector.
Local Authorities are increasingly looking to the PRS to assist
them in housing the less well off. Huge progress has been made
lately with reducing the number of people housed in temporary
accommodation and the PRS has played a significant role providing
the necessary housing for this purpose. All of this, however,
requires support for landlords who need to be able to access capital
to acquire properties, to improve properties and to refurbish
Unfortunately, at the moment, many providers
of finance have withdrawn from providing finance for the PRS due
to the credit crunch. By and large the specialist providers are
no longer there. The major clearing banks are continuing to provide
some finance but it can be difficult to obtain. Even if it can
be obtained, mortgage lenders are increasing the spreads on rates
of interest, as well as imposing higher charges, such as administration
fees, which results in funding becoming more expensive, notwithstanding
low official interest rates. We are finding that lenders are taking
every opportunity that they can within the terms of current facilities,
or when facilities are due for renewal, to increase the interest
rate in their favour. In some cases, where the borrower is perceived
as being a poor risk, lenders are not wanting to renew the facilities
at all. In such cases overdraft levels are being reduced thus
restricting working capital for landlords. For new loans, providers
have been wanting increased equity injection with loan to value
ratios reduced. Currently, the number of products available to
the "buy to let" mortgage market is vastly less than
at the height of the boom.
3. LANDLORDS RETURNS
A recent survey by BDRC showed that 25% of landlords
are operating at no profit. This is at a time when historically
interest rates have been at their lowest, even though that trend
is now changing so that there is upward pressure on interest rates.
If landlords face higher mortgage repayments due to increased
interest rates then their return will diminish even further.
At the moment likely returns on rental properties
are somewhere between 5% and 8%. From this landlords not only
have to service borrowings but also carry out repairs and generally
manage their businesses. They may also face voids. When looking
at individual landlords accounts it is not at all unusual these
days to see that the rental business is running at a loss.
Research work by the Grainger Trust showed that
prior to the credit crunch relying on rental yield alone was not
viable. The only way in which the PRS was essentially profitable
was a mix of rental yield and capital yields from selling properties.
This was, of course, feasible in a rising market but is no longer
possible in the current climate.
We therefore face restrictions on yields as
interest rates are about to start rising again and lenders who
are increasing their interest spreads.
4. THE POSITION
In their invitation to give evidence to the
Committee, the Committee asked for comments on the impact on householders
in the private rented sector of the current state of the mortgage
market. In our view, this encompasses two aspects. Firstly, those
cases where the landlord is in default and secondly the impact
on the tenant who is the home owner.
We have to accept that at the moment due to
low interest rates there is fortunately less likelihood of landlords
being in arrears because their repayments have been reduced but
this is set to change. This is an abnormal situation and we have
to recognise that as time goes on there will be a return to more
normal conditions with higher interest rates. By and large, throughout
the recession, landlords have been able to find tenants. There
have been significant problems for particular types of property,
especially newly built city centre flats. Whilst some voids have
been experienced, generally speaking, the vast majority of landlords
have been able to find tenants to occupy their properties.
There are also some indications that some lenders
have not actively taken steps to repossess and sell properties
into what has been a falling market. As an Association we are
concerned, however, that this picture may well change as interest
rates climb again and repayments rise. We are also concerned that
where they can, some lenders are looking for capital repayments
under loans which have previously been interest only loans. We
will come back to this issue later. We believe that it is imperative
that lenders work with landlords and only take enforcement action
as a last resort. When it comes to enforcement action, we want
to draw the Committee's attention to a number of issues relating
to "out of court" enforcement which are not normally
applicable to owner occupier borrowers. The RLA believes that
a significant problem could built up as interest rates increase
and therefore repayments rise as time goes on. In turn, this could
adversely impact on tenants occupying rented properties.
So far as protection for occupying tenants is
concerned, the RLA has strongly supported Dr Brian Iddon's Mortgage
Repossessions (Protection of Tenants etc) Bill which is currently
going through Parliament. Our support was noted by Dr Iddon in
his speech on the second reading of the Bill and by others. In
fact, the RLA has argued that protection for tenants should go
further. In our submission to the Government Consultation on this
topic, we argue that normally for all tenants, including unauthorised
tenants, the objective should be to protect their contractual
position for up to 12 months unless there were exceptional circumstances.
In other words, if a tenant had, say, nine months left on his
tenancy agreement then that tenant would be entitled to remain
in the property for the remainder of the tenancy agreement, assuming
he paid his rent and otherwise complied with the tenancy terms.
This would apply even if the tenant was unauthorised. The rent
would then be paid to the lender. We believe that this would assist
tenants who find themselves in a situation which is no fault of
theirs. Our experience has shown that the position of the tenants
is often ignored when it comes to repossession and the implementation
of Dr Iddon's Bill will go a long way to address this balance
in favour of tenants.
5. ENFORCEMENT AGAINST
Unlike mortgage arrears in the case of owner/occupiers
lenders have two routes which they can pursue, one in Court and
the other out of Court.
As regards Court possession proceedings, these
are now covered by the relevant Civil Justice Protocol which does
include unregulated residential mortgages. As this only came into
force relatively recently it is still too early to say whether
or not it has been successful but, at the moment, we have no reason
to believe that it will not assist in ensuring that possession
proceedings are a last resort.
In the case of buy to let mortgages lenders
have the alternative remedy of appointing a receiver. Normally
this is done out of Court relying on the powers contained in the
Law of Property Act 1925 and the terms of the mortgage deed itself.
Such a receiver is agent for the borrower (not the lender) but
will collect the rents/manage the property on behalf of the lender.
Possession proceedings will not then be taken because the whole
object is for the lender to be able to secure the rent to reduce
the mortgage debt.
The RLA is receiving a number of complaints
from members regarding these procedures. Receivers do not have
to be licensed insolvency practitioners. They are usually surveyors
but sometimes solicitors. These complaints focus on the costs
involved in this process. One particular member complained that
he was now excluded altogether from managing the property. He
had the necessary skills to carry out minor repairs himself. Now,
however, the receiver was using expensive contractors and the
cost of doing this was, of course, deducted from the rent thus
reducing the amount available to pay off the mortgage debt.
Experience shows that various middle men become
involved in this whole process. The receiver will be appointed
who in turn may employ a specialist mortgage arrears management
firm. In turn this firm may subcontract the actual management
to a local managing agent. Various contractors will then be involved
to carry out repairs etc. At the end of the day all of this falls
on the borrower who may even be faced with negative equity. There
is no control over the level of charges of such receivers, in
practice. In theory they can be challenged in court but the costs
involved are likely to outweigh any advantage obtained. Mortgage
deeds contain clauses which give lenders/receivers unfettered
discretion in reality. This is an area of growing concern which
we would like to draw to the Committee's attention.
6. MORTGAGE COVENANTS
Another area of increasing concern are the complaints
which we are receiving from members about how lenders are operating
certain covenants. At the moment these centre on loan to value
covenants. What is happening in some cases is that lenders are
requiring mortgage properties to be revalued. This is done at
their insistence by their own surveyor/valuer. This can apply
even though the borrower is fully up to date with his/her repayments.
If the loan to value covenant is breached, which will be due in
essence to the falling market, the borrower then either has to
provide security or pay down part of the loan. In practice, at
the moment, it is then virtually impossible for the borrower to
find a substitute lender to refinance the loan. We would stress
that this is in a situation where the borrower is still able to
make the repayments in full. Obviously, if the borrower is not
keeping up the payments it can be a different matter. Mortgage
lenders are not prepared to take a view and wait for the market
One of the particular problems experienced is
the attitude of lenders valuers in this situation. They cover
their backs and are very conscious of potential claims for negligence
in carrying out such a valuation. It is very difficult to value
in this situation in a falling market or a market where there
are few transactions, as is the case at the moment.
One example where we have encountered this problem
is that the lender insisted on its own valuer. The borrower himself
had the same valuation carried out by another valuer, who was
an approved valuer for the very same lender! There was a difference
in valuation of a quarter of a million pounds approximately, some
25%! The borrower's own valuer valued the property as being worth
£250,000 more that the valuation ascribed to it by the lender's
valuer. In reality there is very little a borrower can do about
this in this situation.
It is interesting to hear the lender's justification
for taking this action. Lenders maintain that in this situation
they have to make returns to the Financial Services Authority
who treat these kind of situations as more risky. This increases
the amount of Tier 1 capital which the lender then has to provide
to meet FSA requirements. Incidentally, in this case the bank
insisted on substantially increasing the margin charged by way
of interest to the borrower because the borrower was in default.
7. THE EFFECTS
As alluded to in the previous paragraph, lenders
are under obligations to increase their Tier 1 capital. This in
turn is reducing the amount available for borrowing. Lenders themselves
are facing the double whammy of the inability to access the wholesale
markets for funding, as well as likely increasing costs of borrowing
both because of the demand to finance the public deficit and the
need to refinance borrowings that the lenders themselves have
taken out which fall due for renewal over the next year or so.
Lenders are increasing interest rates because of the increased
cost of borrowing which they encounter. All of this is perpetuating
the credit crunch. In turn this is adversely affecting the PRS
because of the inability of landlords to access funding or to
do so on reasonable terms.
8. IMPACT OF
We have two main concerns about the potential
impact should FSA regulation be applied to buy to let mortgages.
The first is how the concept of affordability would be applied
to the buy to let sector, especially to experienced landlords.
Secondly we would be concerned if certain practices were to be
outlawed. In particular we would be concerned if there was any
attempt to end interest only mortgages. This has been talked about
in certain quarters. However, the interest only model is a vital
part of the business model for many landlords. It is not necessary
in our view to factor in capital repayments either by making them
mandatory or including them in any assessment affordability. It
is perfectly normal to roll over funding in a commercial world.
We have already pointed out the adverse impact of low returns
and this will be threatened even further if there were any obligation
to repay capital.
The RLA recommends that the Committee should
make the following proposals:
1. Whilst welcoming the measures which would
result from the enactment of Dr. Iddon's Bill, more extensive
protection should be conferred on households in the private rented
sector in the event of possession proceedings being taken. Normally,
the expectation should be that the existing contract tenancy should
be honoured (up to a maximum of 12 months) so long as the tenant
pays the rent to the lender.
2. The Council of Mortgage Lenders should issue
a Code of Practice to its members dealing with out of Court enforcement,
particularly in relation to the use of receivers. Restrictions
should be recommended to limit the amount of charges which can
3. The Council of Mortgage Lenders should also
issue practice guidance regarding the valuation of properties
in relation to loan to value ratios. In particular borrowers should
be entitled to select the valuer (so long as the valuer is on
an approved panel for the lender in question) and that such guidance
stresses the need for an independent judgment to be exercised
as to the value of the property in question. A procedure should
be set out to deal with valuation disputes in this situation.
4. If the FSA regulates buy to let mortgages
careful consideration needs to be given as to how regulation would
apply at the micro level particularly in relation to issues such
as affordability and interest only mortgages.