Standard & Poor's warns buy-to-let loans will suffer

19 November 2008

Historically the loans have performed better than the mainstream market in terms of arrears but S&P's most recent analysis shows that this is not the case in the future.

When compared to prime loans buy-to-let mortgages from 2007 fare far worse in the face of rising interest rates, limited credit and fluctuations in supply and demand.

The report also shows that the number of arrears rises significantly as the LTV rises between 60% and 85%.

The report says: "Later vintage buy-to-let mortgages are now underperforming, with looser initial underwriting standards and lower absolute growth in rental coverage since origination, making performance more sensitive to the currently constrained credit environment.

"We estimate that just over 50% of buy-to-let loans outstanding are from the worse-performing 2006 and 2007 vintages, and expect that the BTL sector will soon begin to underperform versus the overall mortgage market on aggregate measures.

"We have observed that although marginal buy-to-let borrowers generally have lower LTV ratios at origination than their owner-occupier counterparts, they typically have significant income gearing, which is more directly linked to month-on-month affordability and hence arrears performance.

"We believe that the buy-to-let 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."