Buy-to-letwatch: Should lenders look at value rather than size?

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I read an interesting report recently about the types of property being let in London. The article focused on small studio apartments although “small” is perhaps an overstatement; a politician called them “rabbit hutch properties” and lambasted landlords for letting them out at rents of over £1,000 a month.

These apartments, according to the report, are as small as 100 square feet and have been dubbed semi-studios. They have sparked outrage among some groups with Labour housing spokesman Tom Copley claiming the impact on the tenants’ quality of life will be “enormous” and Shelter hitting out at the private rental sector.

There are a number of issues to address here. 

First, we can all agree that charging £1,000-plus for a property of 100 square feet is ridiculous. However, there is clearly a demand for these properties (more than likely because of their location), otherwise the landlords would never be able to achieve such a figure. And when you compare it with the rental costs in London as a whole, it is not that surprising.

Second, the report raises the issue of funding. Most lenders will offer a mortgage on a studio flat only if it is bigger than 30 square metres (323 square feet), including lenders such as The Mortgage Works and BM Solutions. 

Anything smaller, even if of a high value, will struggle to get funding. This rules out many London studio flats and sparks a debate on whether lenders should be looking at values rather than size.

We all know location is key when it comes to property, which is why London property prices are so high to begin with. Surely lenders can recognise that a 29 square metre flat in Chelsea offers better security than a 31 square metre flat in a remote part of North Wales?

Should lenders really refuse to offer a mortgage on a property that will be much more desirable as a result of its location on the basis of a couple of square feet? 

By basing any decisions on value instead, they would get a truer picture of a property’s rental potential.

Finally, a number of changes have been introduced by lenders lately which should help would-be buyers in London to get on the property ladder. For example, TMW increased its maximum loan amount to £500,000 for 70 per cent loan-to-value, up from £350,000.

High-value studios and, indeed, properties in general are plentiful in the capital so changes such as these should offer some assistance to buyers.