Despitethe good news announced yesterday about interest rate cuts, Landlords thatare defaulting on their mortgages are forcing UK Banks and Buy-to-Let Mortgage Lenders to consider alternative options torepossession sales.
Traditionally, if a homeowner or investor defaulted on their mortgage, the lending Bank would repossessthe property, instruct a Receiver of Rent to manage the tenancy out, and thenengage with a local Estate Agent to sell the property on the open market inorder to minimise any further financial losson the loan. The selling Agent would usually be given a maximum of 6 – 8 weeksto find a buyer for the property and if they were unsuccessful, the Bank wouldthen put the house up for auction to be snapped up by another budding investorbuyer!
Although the Banks wereforced to accept a lower sale price on the property, it was the strength ofrising house prices that would support any lower offers accepted whicheffectively, caused an acceptable difference between the sale price and thetrue value of the property.
However, as of the last 6 12 months, house prices have continued to fall and selling property at auctionhas become a definite last resort.
The fall in house pricesand the increase on cost of living has had a knock-on-effect on repossessions as more and more home owners fall into negative equity.The number of properties repossessed by mortgage lenders in the UK has risen by48% in the past year.
The Council of MortgageLenders (CML) said there were 18,900 repossessions in the six months to June,up from 12,800 in the same period last year.
Nowadays, if a Bank is torepossess a property and try and sell it on the open market, they could expectto achieve a selling price of at least 20% – 30% under market value leaving amassive deficit on the original loan. Great news for the prospective investmentpurchasers looking to fill their boots with bargain investment deals (if theycan secure a mortgage that is) however, a major headache for the Lenders hence, a shift in pattern is forming.
Buy-to-let Lenders will nowface the task of becoming Landlords themselves.
As a Landlord defaults onthe mortgage, the Lender will appoint the receiver of rent, in this case, thiswill be the Lender itself and the in-house Property Management Departmentwill then manage the tenancy throughout its fixed term period. The Lender willassume the role of the Landlord and fulfill any obligations set out in theoriginal tenancy agreement. At the end of the fixed term, instead ofrepossessing the property and selling it on the open market, it will be in theBanks best interest to maintain a tenancy or find new tenants and ride out thenext 12 18 months or at least until the housing market finds it feet again.