How to keep your buy-to-let afloat AND help tenants in the lockdown: From rent cuts to mortgage holidays?
Landlords are eligible for three-month mortgage payment holidays
But should you offer tenants who are working from home a payment holiday?
Does offering a rent holiday place you in breach of your mortgage contract?
What legal documents do you need if you agree a rent holiday?
The coronavirus lockdown has caused severe financial strain for millions of people across Britain, prompting unprecedented financial aid packages from the Government for businesses and individuals alike.
While mortgage payment holidays of up to three months are being offered to both homeowners and landlords, who may struggle to keep up with repayments during the lockdown, renters have been told they will be able to stay in their homes during lockdown even if they fall behind with payments.
Meanwhile, the Government has officially asked landlords ‘to show compassion and to allow tenants who are affected by this to remain in their homes wherever possible’.
What does this mean for landlords in practice though? Should you be proactive with tenants and offer them a temporary rent holiday, knowing that they may be suffering?
From speaking to landlords and letting agents, This is Money knows that many are actively trying to help their tenants through tough times and willing to do what they can for those whose finances have been sideswiped by coronavirus.
On the flipside, how should you react to tenants asking for a rent reduction when you know full well they’re still working full-time from home and your checks when they moved in showed they had a big salary and lots of cash?
What should I do if my tenants want a rent reduction?
There’s no right answer to this but everyone agrees that the most important thing to do is talk to tenants to understand why they need a reduction.
Steve Harriott, chief executive of the TDS tenancy deposit protection scheme, says: ‘Under the new guidelines tenants are still liable for their rent, however, if they are facing financial hardship there is support out there.
‘It’s really important during this unprecedented situation that the lines of communication between renter and landlord are kept open.
‘Now is the time to be having an honest and frank conversation about rents and financial concerns, working together to put a rent payment scheme in place.’
Angus Stewart of online buy-to-let adviser Property Master argues that in most cases, it will make sense to agree to a rent reduction temporarily.
‘If they ask for a rent reduction it would be logical to look favourably on it if they have been a good tenant in the past,’ he advises.
‘If you can still afford to cover that loss for a couple of months it is a sensible thing to do as the last thing you want at the moment is an empty property.’
Jeni Browne, sales director at buy-to-let specialist adviser Mortgages for Business, says they have been talking to many landlords over the past fortnight and the most frequent approach is to defer rent payment rather than offer tenants a waiver.
The view from lenders is along the same lines. Bob Young, chief executive of specialist buy-to-let lender Fleet Mortgages, says many landlords, where possible, are already helping.
‘Providing temporary help, especially if they’re good tenants, is likely to be the sensible option for most landlords,’ he adds.
Will I be in breach of my mortgage contract?
In ordinary circumstances, it’s possible that allowing your tenants to pay less rent than agreed in their tenancy agreement would breach your contract with your lender. But these are not ordinary circumstances.
Young’s view, as a lender, is that you should be fine to agree a temporary rate reduction with your tenant if they require it.
Stewart agrees: ‘This is an exceptional situation and it is likely your lender would rather have some revenue from you than none. In these difficult times it is hard to see a lender wanting to enforce any breach of contract against you if you have explained the situation and are seeking to make some sort of payment.’
David Cox, chief executive of ARLA Propertymark, suggests where a rent reduction is essential, landlords, tenants and letting agents should again undertake the affordability check on the tenants’ finances that happens during the initial referencing stage.
‘It’s important to understand what tenants could afford on any reduced or furloughed income,’ he explains.
‘It would also need to be made clear whether this is a temporary rent reduction or a deferral.
‘If it’s a deferral, a payment plan will need to be set up to ensure the tenant clears the rent arrears that are accrued during this period.
‘Additionally, landlords and agents will need to be clear about whether they will implement the interest clauses that exist for rent arrears on most tenancy agreements.’
Should I offer my tenants a rent reduction, even if they haven’t asked for one?
This is Money has heard several examples of landlords generously offering tenants a temporary rent reduction during the coronavirus lockdown – even where tenants don’t request it.
Whether you should offer is really down to you and whether you can afford to.
Voluntarily getting into mortgage arrears on your buy-to-let is not sensible and will be costly.
Chris Sykes, a broker at Private Finance, warns: ‘Some tenants may have interpreted the government mortgage holiday announcement as a way for their landlord to simply pocket three months of rent, when, in fact, those mortgage payments will still need to be paid in the long run.
‘Clarifying this offers landlords a way to communicate with their tenants, understand their current position and potentially offer a reduction.’
He adds: ‘Every landlord will take their own approach to managing their tenants’ payments.
‘It often depends on a landlord’s long-term plan – and how much they value a tenant as part of this.’
Stewart also points out that many people won’t need a payment holiday: ‘There are still many people in secure employment and not in need of a rent reduction.
‘If your tenants come to you because they have for example lost their job or suffering a serious reduction in income, then you should certainly consider helping them.’
Will I need a legal contract in place?
It should be sufficient to have a letter confirming in writing what you have agreed with the tenant, the amount of rent they will pay and the dates the reduction applies, according to Stewart.
‘It is very important to have certainty on both sides and a written and signed agreement will help in this regard,’ says Stewart, who advises that landlords also think about agreeing a repayment schedule to make up any rent reductions or rent holidays.
‘For the tenant it may well be better off asking for a reduction in rent as less will build up in arrears,’ he says.
Young adds: ‘Obviously if you give a rent holiday you are not protecting your income, and you would certainly need something between you and the tenant confirming the arrangement in writing.
‘They may need this as evidence to support a claim for state assistance, for example.’
How do I apply for a buy-to-let mortgage payment holiday?
As is also the case for homeowners applying for a payment holiday, the sooner you contact your buy-to-let lender the better.
Nearly all lenders are reporting a huge surge in customer enquiries and we’re hearing lots of complaints about the time it’s taking to get through on the phone.
Depending on your lender, there may be an option to fill in a request online as a first step.
Many landlords have portfolios of properties and may need to make multiple applications for leeway from a number of different lenders.
It’s possible that your mortgage adviser will be able to assist you with this, though you should expect to pay something for this service.
‘It is absolutely essential to agree in advance any repayment holiday with your lender,’ warns Stewart.
‘To simply miss payments without that agreement will adversely affect your credit record.’
David Hollingworth, of mortgage broker London & Country, adds: ‘Make sure you understand the knock-on effect of a payment holiday.
‘Just because there are no payments made doesn’t mean that interest doesn’t continue to accrue.
‘At the end of the payment holiday the outstanding balance will be rescheduled over the remaining term, so payments will most likely be higher and more interest payable over the life of the loan.’
Will insurance pay out for rent shortfalls related to coronavirus?
There have been reports that insurers aren’t paying out where rent shortfalls due to coronavirus are given as the reason for the claim.
Indeed, both Young and Stewart agree that although different insurers and policies will offer different levels of cover, it’s unlikely that your rent arrears will be covered.
Check the small print in your policy document carefully.
Keep calm and carry on
While the lockdown continues, all the experts agree that finances will need to be flexible but the message to landlords is not to panic.
‘Landlords need to be sensible and use their common sense,’ counsels Young. ‘Some tenants will ask for relief and you’ll need to respond accordingly, weighing up both their and your situation.
‘This is likely to be a temporary issue and hopefully both landlord and tenant will be able to work through these issues with that in mind.
‘From a landlord’s perspective, investing in property has its highs and lows and you need to look at this with a long-term perspective. Indeed, investments of all kinds have their ups and downs, as those heavily invested in the equities market through their pension schemes have also discovered.
‘Property still remains a good long-term asset to invest in, despite what is happening in the market right now.’