England’s rapidly growing private rented sector isn’t playing the role it was set up to play.
When you hear that a third of renters are families with children, or that as many as four in ten renters receive some housing benefit to pay their rent, it becomes clear that the image of renters as students and mobile young professionals is very out of date.
Last week this tension between perception and reality hit the headlines, with reports that Nationwide had prevented landlords with mortgages from its buy-to-let subsidiary, The Mortgage Works, from letting to tenants receiving housing benefit.
Nationwide wisely reversed the decision by the end of the week. But the episode brought into sharp relief how the mortgage market can struggle to adapt to the changing needs and demands of renters.
Nationwide are now the only major buy-to-let lender that explicitly permits their borrowers to let to tenants receiving housing benefit.
Similarly, no major lenders allow landlords to offer longer tenancies for the 1.3 million families (and others!) renting for the long term.
This ban persists despite the fact that millions of renters are desperate for more stability and predictability, while longer tenancies can already be offered by landlords and can be good for their business model.
So, what do most lenders have against renters who receive housing benefit or want longer tenancies?
On housing benefit, lenders may perceive that people on benefits are more likely to fall into rent arrears, increasing the risks that their landlord may not meet their mortgage commitments.
In reality, these risks to lenders may be overstated. Almost 40% of tenants receive some housing benefit, and only 10% of landlords report arrears. And only half of those – i.e. 5% of landlords – lose any money as a result. In many ways, housing benefit can be a more stable income stream than someone’s salary, which is partly why housing associations were traditionally able to borrow at such low rates.
It seems a difficult policy to enforce, as many renters will not receive benefit at the start of their tenancy, and may apply for it if they fall out of work or their hours (and income) reduce. Many landlords will unwittingly be breaking their mortgage conditions, but with no material difference to the rent payments they receive and their ability to pay their mortgage.
On longer tenancies, lenders worry that a tenanted property will be harder to sell if a landlord defaults on the mortgage. But longer tenancies also give renters a real stake in a home, and may actually reduce the risk of them leaving and creating a costly void period for the landlord.
On both counts, it’s not clear that lenders really know why landlords get into arrears and default on their mortgage. Lenders should be able to tell us more about why this happens to justify these restrictions.
My bet is that there’s a whole range of factors – including dodgy lending decisions in the ‘credit boom’ which have led to landlords struggling with their mortgages – and yet, it’s lower income renters and families who are paying the price as a result of these restrictions.
The implementation of Universal Credit and the rapidly growing number of families with children renting creates a massive impetus for lenders to bring their policies up to date.
Lenders need to urgently review their policies and make sure they are not holding the sector back from meeting people’s housing needs. Government must keep a close eye on this and make sure that it does not become even harder for people to get a decent private rented home.
Update 08/03/13: Lloyds Banking Group have updated their policy. They have joined Nationwide in removing restrictions on their landlord borrowers from letting to people receiving housing benefit.