Azara Blog: Buy-to-let with low deposits

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Date published: 2005/07/30

The Financial Times says (subscription service):

Thousands of property investors have been circumventing the tight rules on buy-to-let lending by counting discounts on new flats as deposits, the Financial Times has learnt. Banks however refuse to admit such practices take place.

Under the strict criteria of most lenders, investors can only take out buy-to-let mortgages if they have a large deposit, typically 15 per cent or more. It is understood that many members of property investment clubs have secured large loans with tiny deposits, exacerbating the risk that they will wind up with mortgages exceeding the value of their homes.

The Council of Mortgage Lenders told the FT that banks only lend on a loan-to-value ratio of 85 per cent or less on a buy-to-let flat.

Yet one large property investment club, which did not wish to be named, said it was common for members to obtain a buy-to-let loan with a deposit of about 5 per cent. This was possible because loans were measured against the original asking price, which was sometimes reduced by up to 15 per cent.

Andrew Heywood, head of policy at the CML, insisted this was rare because surveyors had to report on the actual price paid. Banks then had to lend against the purchase price or the value of the home whichever was lower.

A storm in a teacup. If investors are "circumventing" rules it is only because some banks are sometimes willing to allow that to happen, and it is up to the banks to decide their loan criteria, not the FT. Needless to say the whole buy-to-let market has contributed to the UK property bubble, and these kinds of loose loan practises happen in a bubble.

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