Landlords in negative equity fear
Updated on 17 November 2008
Up to 40% of landlords with a buy-to-let mortgage could be in negative equity by the middle of next year, a ratings agency warned.
Standard & Poor's Ratings Services said that between 20% and 40% of buy-to-let borrowers could owe more on their mortgage than their property was worth by mid-2009 if house prices fall by between 25% and 30% from their peak.
This figure compares with only around 14% to 20% of homeowners across the market as a whole being in negative equity.
Part of the problem is that investment landlords are far more likely to have interest only mortgages than their residential counterparts, increasing their vulnerability to house price falls as they are not repaying capital on their loan.
The group said around 88% of buy-to-let mortgages are interest only, compared with just 29% among owner occupiers. Investment landlords also tend to have less equity in their property, with average loan to value (LTV) ratios of 75%, compared with 55% in the residential mortgage market.
S&P said nearly half of the buy-to-let mortgages the group looked at had LTVs of more than 80%. The buy-to-let market has grown rapidly in recent years as people became keen to cash in on house price growth by investing in property.
S&P said there had also been an increase in amateur landlords, such as people who held on to a previous home and rented it out when they moved up the property ladder, or couples who rented out one partner's property when they moved in together.
There are currently more than 1.1 million buy-to-let mortgages in force, accounting for 11% of the mortgage market.
But S&P warned that the sector would soon begin to underperform compared with the overall mortgage market, with the credit risk to the sector rising on the back of declining house prices, the mortgage shortage and growing uncertainty about the economy.
The group said the loans were already showing a proportionately higher level of repossessions than mainstream mortgages. Based on an analysis of 200,000 securitised buy-to-let loans, accounting for nearly 20% of the market, it said buy-to-let arrears were running at around 3.7% at the end of June, compared with 2.9% for prime mortgages to owner-occupiers.
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