Assessing vulnerability in the housing market

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Assessing vulnerability in the housing market
Photo: George Becker via Pexels

When it comes to the housing market, who might be more at risk? 

In relation to who is more vulnerable in terms of buy-to-let landlords, tenants or homeowners with residential mortgages, David Thomas, chairman of the Society of Mortgage Professionals and joint managing partner of Chadney Bulgin, says: "Ultimately they all are vulnerable, although tenants and residential mortgage holders are most at risk due to reduction in, or loss of, income.

"Landlords are still at risk, but in my experience, they are more likely to have a ‘slush fund’ in place to see them through such a period."

Not everyone agrees buy-to-let investors are in a less precarious position. 

Buy-to-let landlords may have a 'slush fund' but few will have enough to mean they and their tenants will be immune to this crisis. In fact, some commentators believe these clients may be even more exposed to risks.

As Conor Murphy, chief executive of mortgage platform Smartr365 and Capricorn Financial Consultancy, explains, any support from landlords to their tenants at this time will inevitably be limited, especially as government has extended protection for tenants – which is necessary to prevent homelessness at a time of pandemic.

He says: "In providing its support for tenants who have found themselves vulnerable through the pandemic, the government has inadvertently increased the risks to buy-to-let mortgage borrowers. This has controversially made buy-to-let landlords the most financially vulnerable to the issues created by the coronavirus pandemic.

"The overall messaging through the crisis has encouraged tenants to take payment holidays on their rent. But, if rent payments are not made, the landlord is eligible for a payment holiday.

"This impacts the landlord’s financial standing down the line, since interest on the overall mortgage amount continues to accrue, however the rent payments can remain unfulfilled with no long-term repercussions."

So this could mean any additions to a buy-to-let client's portfolio might be harder to achieve in the future.

Additionally, the government has revised the eviction rules in place through the pandemic. These now require tenants to receive six months’ notice before any repossession proceedings can take place.

While Mr Murphy says this is "excellent support for tenants facing financial hardship through the crisis", he warns: "These have a serious, negative impact on the landlord who may now face six months without rent payments, while continuing to accrue interest on their mortgage payments."

David Kennedy, chief lending officer at Masthaven, says: "For buy-to-let customers, it’s a juggling act; balancing the need to support tenants during the pandemic alongside their own financial concerns, with options of legal redress limited during this time for non-Covid related arrears."

Residential 

They are not the only group at risk, however. Residential mortgage holders may find themselves in a similar predicament. 

Kate Davies, executive director at the Intermediary Mortgage Lenders Association, comments on the issue of vulnerability in the sector: “The coronavirus crisis has impacted peoples’ finances in very different ways.

"While some individuals have been able to save additional disposable income because of the lack of opportunity to socialise or attend social events, others have struggled with job insecurity and the financial strain of supporting loved ones.

"Crucially though, there have been government-led support measures in place, such as the payment deferral scheme, which helped many people to manage their mortgage repayments through this difficult period."

Mr Kennedy agrees there have been some government initiatives, such as payment deferrals or the Coronavirus Job Retention Scheme that have helped.

However, he warns: "The indiscriminate nature of Covid-19 means vulnerability can exist across all sectors of our customer base and we assess everyone’s circumstances on an individual basis, regardless of product type.

“A lot of this vulnerability is due to the interconnected nature of the market. For example, in some cases rent arrears have impacted customers’ ability to pay their residential or buy-to-let mortgages (or both)."

And there are other issues on the horizon when the support schemes fall away. Mr Murphy states: "Residential borrowers have received well-publicised support from the government, with the most prominent being payment holidays for those who have found themselves financially vulnerable because of the pandemic and the associated restrictions."

This, alongside furlough and various other income schemes, should mean residential borrowers are very well protected at present. Moreover, the swathe of job cuts witnessed in 2020 seems to have evened out – for the time being, at least. 

But Mr Murphy warns: "One issue we are seeing is that some borrowers may have abused the payment holiday scheme by taking one when not required. Many may not have appreciated the full terms of the holiday and could now be lumped with higher payments due to the interest accrued during the break.

"We may also begin to see further issues down the line – while government rules state that payment holidays cannot impact a borrower’s credit score, they have acknowledged that the holidays will still be considered in future lending applications. It will be vital that borrowers in this situation are using an experienced broker."

Tenants

Often left out of the equation are tenants, but while these may not be mortgage clients, they may well be clients with wealth management and pension needs who, because of the pandemic, are now finding it harder to make ends meet due to unexpected unemployment or a severe reduction in their hours.

After all, the vast majority of tenants are hard-working individuals and the vast majority of landlords are decent businessmen and women. Both sides need support in an unprecedented pandemic situation, the likes of which have not been seen in living memory.

Mr Murphy comments: "Tenants who have found themselves vulnerable can easily request payment holidays, with no repercussions for future payments."

While current measures to protect tenants from eviction are welcome, what happens in the future when the financial support schemes stop and tenants are still unable to meet their monthly outgoings?

Also, as Mr Murphy says: "The tenancy deposit protection schemes provide excellent support for renters through challenging times, but this can negatively impact the landlord’s financial situation if rent payments are not made and deposits sit in limbo for months without a decision."

So, there are many factors to consider.

Everyone at risk

Martin Stewart, founder of London Money, agrees anyone and everyone can be at risk, whether they are a buy-to-let landlord with a few properties, a mortgage borrower or a renter.

He explains: "There are vulnerabilities in each sector. Landlords will be pincered between falling rents and increased taxation coupled with tenants being unable to pay, while the courts make it difficult to remove them from the property.

"Main residential owners may well be sitting on a ticking time-bomb, whereby they funded a lifestyle based purely on 2019's income and an expectation of that being the same or more in the years ahead.

"Clearly, past performance really is no help when it comes to global pandemics."

Simoney Kyriakou is senior editor of FTAdviser