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19 November 2008 Buy-to-let landlords facing difficulties

A new report by credit ratings agency Standard & Poor has revealed serious problems in the buy-to-let (BTL) market.

The growth of BTL landlords has been a much-discussed feature of the UK house price boom during the past decade, but with house prices falling and the possibility of tenants defaulting on their rent as unemployment rises, the market is facing difficult times.

The study found that by June this year BTL mortgages had a repossession rate greater than ordinary home loans, with 3.7% of BTL mortgages being in arrears compared to 2.9% of ordinary residential mortgages.

The problems are particularly concentrated among BTL mortgages granted in the past two years, where landlords find themselves in negative equity due to falling house prices. Half of the outstanding mortgages found by the study were granted in 2006 or 2007.

Furthermore, the report predicts that between 20% and 40% of buy-to-let (BTL) landlords will fall into negative equity if house prices keep on falling at current rates.

“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 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.”

The Standard & Poor report was based on studying 200,000 BTL loans, which equates to approximately 20% of the UK total.