While the buy-to-let property market may seem an attractive investment, with house prices showing no rise and rents increasing as the availability of houses in the private rental sector struggle to meet demand, potential landlords might be interested in the latest findings by the Tenants Arrears Tracker. Set up by Templeton LPA Receivers, it has tracked tenant rent arrears in England and Wales since 2008 and has shown that in the second quarter of this year there were 100,400 tenants in severe arrears. Severe rental arrears are defined as being at least two months behind with rental payments and even between the first and second quarters of 2012 there has been an increase in 7,000 tenants who meet this classification. Although the proportion of tenants in severe arrears might at present only be 2.6%, it is still a great concern, not just for tenants but landlords too.

insurance rent arrears

Landlords Facing Rent Arrears

Why tenants are struggling

The current economic situation has a lot to answer for and this extends to the affordability of private rental properties. An increase in the general cost of living and a fall in wages in real terms follows that tenants now have a lower proportion of their wages available to cover rent. Although overall the number of tenants in arrears may have fallen from 9.9% in April 2012 to 8.9% the following month, this should not lure us into a false sense of security. One explanation for a seeming decrease in the number of tenants in arrears is the increasing number of those that would be considered more financially comfortable, who would at one time have been on the property ladder themselves but are now faced with renting; they are diluting those tenants struggling financially. The uncertainty of the job market in various sectors and little hope of a quick improvement in the economy mean that the number of tenants in serious arrears are likely to continue to increase.

The implications for landlords

Perhaps landlords need to be grateful that interest rates remain low allowing more affordable mortgage repayments. If it were not for this helping them to keep up with payments on their mortgage when their tenants are struggling to pay their rent, the number of buy-to-let mortgages in arrears would likely be a lot higher than it currently is. In the first quarter of 2012 the number of buy-to-let mortgages more than three months in arrears fell by 4% compared to the last three months of 2011, though there is still double the number in arrears with mortgage repayments as seen four years previously. While a reversal in the fall in arrears on buy-to-let mortgages is unlikely to be seen until interest rates rise again, the rising number of tenants in severe arrears will put increasing pressure on the situation. Few would enter the buy-to-let property sector unless they can see a financial gain, but at present capital gains for landlords are not what they were two years ago.

What landlords can do

Although no landlord ever really wants to evict a tenant unless they really have to, the increase in tenants in severe arrears means that unfortunately this is becoming more necessary. In the first three months of this year 26,060 tenants faced eviction by a court order, a 5% increase on the same period in 2011. However, to prevent the need for serving evictions, landlords might choose to be more selective over the areas in which they buy properties. Buying in an area where tenants are more likely to be able to keep up with rental payments is certainly worth considering; even if this means overall earning less from your property in a year, it is better to secure twelve months of rent rather than say nine. For anyone contemplating entering the buy-to-let market now, they should carefully consider the implications of tenants struggling to make rental payments on their own ability to pay their mortgage, particularly if they plan to have multiple properties.

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