Should buy-to-let lenders allow longer tenancies?
The Government is meeting lenders next month in a bid to boost long-term tenancies.
Buy-to-let mortgage lenders are coming under political pressure to loosen criteria and allow long-term tenancies.
Next month, the Department of Communities and Local Government is hosting a summit with mortgage lenders to discuss the private rented sector.
Top of the agenda is lender restrictions on the length of assured short-term tenancy agreements.
Most lenders offer a maximum of 12 month tenancy agreements under the terms of a buy-to-let loan.
There are some exceptions such as Nationwide offering 36 months, HSBC allowing two years and Paragon Mortgages allowing greater flexibility for certain tenants.
As the private rented sector grows, thanks to more families in rented accommodation for longer spells, campaigners are pushing for greater security for tenants.
Last year Shelter published a report entitled “A better deal: Towards more stable private renting”, which called for much greater tenant certainty over rents and their neighbours.
Politicians have now picked up the baton. A DCLG select committee report into the private rented sector, published last month, identified lender restrictions as a key barrier to providing greater security of tenure.
Labour MP Teresa Pearce raised the issue with Bank of England Governor Mark Carney at the Treasury select committee last week.
She said: “It is a restriction on stability in the rental market. Some of the children in my constituency have been moved four times in five years so this is a really big issue for families.”
Next month’s summit will have to address the concerns of lenders, landlords and tenants if it wants to remove barriers to tenant security.
Lenders are reluctant to increase tenancies because of fears they may not be able to repossess the property under tough eviction rules.
There are two types of recovery under the Housing Act 1988. In a Section 21 agreement all you have to do is serve notice in the appropriate way without court action, providing the tenant has been in the property six months.
Tenants can be removed mid-agreement if there is a major breach but the only other way is through a Section 8 agreement. This kicks in when a tenant is two months in rent arrears and is still contestable in court, which landlords say is time consuming.
Buy-to-let consultancy Lettingfocus.com owner David Lawrenson says: “If the landlord has defaulted on a loan but the tenant is still there and the fixed term is long, they would have to wait to the end of the term to recover the property.”
The Council of Mortgage Lenders said in the summer it is working with members to relax terms and conditions, but so far only Nationwide has increased tenancies, from 12 to 36 months.
A Nationwide spokesman says: “A lot more families are renting so longer-term tenancies give tenants peace of mind, and also more security for landlords.
“It is an interim solution but as the first lender to offer it we thought we would start with three years. We need to gauge the reaction but it has been popular.”
Lawrenson said he would be surprised if more lenders followed suit because of recovery issues, and the fact the Government would have to “speed up” eviction processes if it wants changes.
For their part, lenders point out there is not much tenant demand for longer-term tenancies. Research from the National Landlords Association shows 81 per cent of tenants are happy with the length of their tenancy agreement. Two thirds say they have lived in their current property for between two and four years or more.
Mortgages for Business managing director David Whittaker says the current levels have been the accepted norm since the Housing Act 1988.
He says: “You cannot have a one-sided contract where the landlord is tied down for three years but the tenant can leave whenever he feels like it. That is unfair.
“99 out of 100 tenants do not want the longer term commitment.There are no major technical issues stopping this, so if this is what tenants wanted then the industry could do it.”
NLA head of policy Chris Norris says long-term tenancies are “easily facilitated” by current rules because deals can annually roll over.
Paragon Mortgages managing director John Heron says flexibility is a key hallmark of the private rented sector and long-term deals could threaten it.
He says: “It is not a binary equation that longer term tenancies are great for tenants because, depending how the lease is drawn up, it is a long running obligation. They need to be clear about how they can fulfil it.
“One reason the private rented sector works as well as it does is because it is extremely flexible. It is cheap to enter and cheap to exit. If tenants do not like it then they can leave after six months.”
Heron says flexibility is also key for landlords.
He says: “Landlords are small business people and circumstances can change, so there are downsides to a long-term agreement for them too.
“They would not have the flexibility of selling a property if they absolutely had to, or varying the rent if they need to because of changing interest rates. It all has to be taken into account when considering long-term tenancies.
“Longer-term tenancies sound relatively straightforward, but actually need a great deal of thought that addresses the full complexity of the issue.”
Article courtesy of Money Marketing