Page last updated at 16:41 GMT, Monday, 17 November 2008

Problems looming for buy-to-let

Derelict house
Will more buy-to-let properties end up like this?

Between 20% and 40% of buy-to-let (BTL) landlords will fall into negative equity if house prices keep on falling at their current rate, a report says.

The credit ratings agency Standard & Poor's says that by June this year BTL mortgages had a repossession rate greater than ordinary home loans.

It warned that financial problems were concentrated among BTL mortgages granted in the past two years.

The report was based on studying 200,000 BTL loans, 20% of the total.

"We believe that the BTL sector could suffer above-average loss severities on repossession cases due to a concentration of certain property types that are witnessing above-average price declines," said Kate Livesey, an analyst at S&P.

"In a downturn we believe that the current stock of buy-to-let loans will carry higher credit risk than the stock of loans to prime owner-occupiers."

More landlords

The growth of BTL landlords has been a striking feature of the house price boom in the UK during the past decade.

As mortgage terms tighten, there has been a growing incidence of default by relatively new, highly-leveraged investors
Bernard Clarke, Council of Mortgage Lenders

As mortgage terms tighten, there has been a growing incidence of default by relatively new, highly-leveraged investors

There are now around 1.1 million such loans in existence, making up nearly 11% of the total of all home loans.

Typically they have been taken out by individuals who wanted to invest in property as a form of long-term savings.

One side-effect of the growth of BTL has been to crowd out some potential first-time home buyers by bidding up prices.

This is because the landlords were able to borrow home loans calculated on expected rental returns, rather than their proven earnings capacity from employment.

But the BTL phenomenon has also provided a much larger pool of homes for people to rent than was the case until the mid-1990s.

Growing problems

S&P says the financial outlook for these landlords is taking a turn for the worse under the impact of the impending recession, with unemployment among tenants likely to rise and rents likely to increase more slowly than in the past.

Its analysis suggests that at the end of June, 3.7% of BTL mortgages were in arrears compared to 2.9% of ordinary residential mortgages.

The problem, it argues, lies particularly with those BTL loans made in the past two years which are now in negative equity because of falling house prices.

"Just over 50% of buy-to-let loans outstanding are from the worse-performing 2006 and 2007 vintages," said S&P.

"We also estimate that around 20%-40% of buy-to-let borrowers could fall into negative equity by mid-2009, based on a peak-to-trough house price decline of around 25%-30%," it added.

Not so bad?

This view of the financial security of BTL is at odds with that presented by the lenders' organisation the Council of Mortgage Lenders (CML).

It has argued that its own figures, which cover the whole industry, show a distinctly lower rate of arrears and repossessions among BTL borrowers than mortgage holders in general.

Just 1.1% of BTL loans were three months or more in arrears in the second quarter of the year, according to the CML's statistics, and just 0.08% were seized by lenders during that time.

By contrast, the arrears rate among mortgages of all types stood at 1.33% in the first half of 2008, with 0.16% taken into possession.

Bernard Clarke of the CML said: "More recently, buy-to-let arrears and possessions have been rising relative to the residential loan market.

"As mortgage terms tighten, there has been a growing incidence of default by relatively new, highly-leveraged investors," he added.



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