Buy-to-let feels the squeeze

Stricter lending criteria are taking a heavy toll on the investment market, writes Simon Carswell

THE DECADE-LONG property boom turned many home owners into property investors as they used the increased value in their properties to borrow to buy more. As prices rose, so too did investors' borrowing and buying power.

Now the credit crunch has tightened lending rules, increased borrowing costs and restricted the size of new mortgages. A landlord's life is no longer plain sailing.

Landlords, or residential property investors as the banks call them, have been hit harder than new borrowers looking to buy a home. Buy-to-let loan rates have risen faster and lending rules for landlords have become more restrictive, with some lenders even withdrawing from the market.

Permanent TSB, the State's largest mortgage provider, said last week that it was pulling out of the buy-to-let market and would not be providing any new loans to landlords for investment properties.

The bank no longer lends to the buy-to-let market in either Ireland or Britain through its British subsidiary, CHL, which suspended loans to landlords in March.

The significance has not been lost on the company's rivals and mortgage brokers, who sold many of the bank's buy-to-let loans.

Permanent TSB was the largest buy-to-let lender, controlling about a fifth of the market. Bank of Scotland (Ireland), which industry sources said was the second-biggest player in the retail market, suspended new buy-to-let lending last month, saying it would return to the market when it had reviewed its products and prices. In just over two months, the two largest lenders to landlords have shut up shop to new borrowers.

Michael Dowling, spokesman for the Independent Mortgage Advisers' Federation (IMAF), said Permanent TSB's withdrawal from the market was "another signal of the deepening liquidity crisis".

"Following on from a similar move from Bank of Scotland, I expect other lenders to follow suit. The remaining lenders in the market will not want to take on this additional business and this will impact the supply of rental properties in the market."

IMAF president Paul Short said Permanent TSB's move was a surprise. "It was very significant because it was a sizeable proportion of their business," he said.

Irish Life Permanent's €8.5 billion UK residential mortgage book, which accounts for more than 20 per cent of the group's €39.2 billion total loan book, comprises mostly buy-to-let mortgages.

The group has an additional €2.3 billion in mortgages on residential investment properties in Ireland. This was one of the fastest growing parts of group business. Its Irish buy-to-let loan book increased 24 per cent last year, outstripping UK and Irish home loan lending.

The landlord market has been a booming area for Irish banks in recent years. Buy-to-let mortgages accounted for 19 per cent, or €6.5 billion, of the €33.8 billion provided in new mortgage lending by Irish lenders last year.

The landlord mortgage market had already started to feel the pinch earlier this year before lenders started raising rates and introducing new loan restrictions.

The value of buy-to-let mortgages fell 24 per cent to €1.2 billion in the first three months of the year from €1.6 billion in the last three months of 2007. It is likely to be down even further by the end of the year following the withdrawal of the two biggest players from the market and tighter lending rules at the other financial institutions.

Ulster Bank and its subsidiary lender, First Active, and IIB Bank, which were the next biggest lenders in the buy-to-let market after Permanent TSB and Bank of Scotland (Ireland), are still providing new mortgages to landlords, though their rates have increased.

Bank of Ireland became the latest lender to tighten its lending criteria for landlords this week.

It told mortgage brokers that it was reducing the maximum loan-to-value (LTV) ratios by five percentage points across its buy-to-let mortgages.

The highest LTV for landlords was cut from 90 per cent to 85 per cent.

The bank restricted its definition of a professional - for the purposes of residential investment loans - to a person with more than three investment properties. It also reduced the interest-only term on its loans and increased minimum valuation requirements.

The bank blamed the changes on "current market conditions".

"Everybody in the market has shrunk back on their appetite for lending in this market," said Tom Foley, chief executive of IIB Homeloans.

He said banks were unwilling to grow new buy-to-let lending due to the higher risks, given that funding costs had increased, interest rates had risen and property prices had fallen.

The latest Permanent TSB/ESRI house price index this week showed that house prices fell at their fastest rate in five months in May. House prices dropped 1.2 per cent in May and were down 9.5 per cent from a year earlier.

Foley said negative sentiment internationally had also significantly affected people's decisions to invest in properties. He said that, despite rents rising last year and remaining "pretty stable" since then, rental yields for landlords - the annual rent as a proportion of a property's cost - were still low, at just over 3 per cent.

Banks have also become more cautious about the buy-to-let market because of concerns about rising bad debts following a profit warning from Bradford Bingley, the largest UK lender to landlords, earlier this month and a significant increase in its mortgage arrears during the month of April.

Bradford Bingley's troubles materialised from "higher-than-anticipated" arrears in £2.1 billion (€2.65 billion) worth of mortgages acquired from GMAC-RFC, the lender owned by private equity group Cerberus and General Motors.

Shares in Bank of Ireland, where buy-to-let mortgages account for 31 per cent of its £27 billion (€34 billion) UK mortgage book, suffered in the fallout from the financial troubles at Bradford Bingley, though the Irish bank pointed out last month that it had seen only a modest increase in its UK mortgage arrears between December and March. It said overall arrears (greater than three months) in its UK mortgages represented 0.63 per cent of loans, up from 0.61 per cent. This compared with 1.5 per cent at Bradford Bingley at the end of April, up from 1 per cent at the end of last year.

Bank of Ireland took a more cautious approach to new buy-to-let loans as rival UK lenders such as Paragon and Bradford Bingley withdrew products and curtailed lending. The Irish bank even withdrew its buy-to-let products for a week to cope with the additional volume of new business applications. It later reintroduced them at higher prices to take account of the rapid changes in the market.

Irish Life Permanent said last week that its UK mortgages were holding up well. Three-month arrears on its UK mortgage book increased to 0.67 per cent of loans at the end of March from 0.5 per cent in December. This compared with arrears of 1.13 per cent across the industry in the UK.

Although banks might be nervously watching buy-to-let mortgages, the ever-decreasing borrowing power of homebuyers may create opportunities for landlords who put up larger cash deposits.

Emer Lang, analyst at Davy stockbrokers, cited a report this week from UK buy-to-let mortgage broker The Money Centre, which found that tenant demand had risen since March, with "lease commencements" up 34 per cent year-on-year for the first five months of the year. The report predicts that the buy-to-let market will grow this year.

"House prices are under pressure at the moment, and there's scope for buy-to-let investors with collateral to get good deals to expand their portfolios," it said.

But, as Lang pointed out, in a declining property market, landlords may choose to sell as they won't want to see the value of their investment properties fall, despite the potential for rents to rise.

Once again, only the brave and cash-rich landlord would consider growing their investment portfolio in a climate of rising rates, restrictive lending and falling property values.