Up to 40 per cent of buy-to-let landlords could find themselves in negative equity by the middle of next year if house prices continue falling at their current rate, according to research from ratings agency Standard and Poor's.
By June of next year, landlords with a buy-to-let mortgage
will be facing higher levels of negative equity than ordinary mortgage holders, the figures show, and will therefore experience more repossessions.
By analysing 200,000 cases – 20 per cent of the market – S&P found that buy-to-let mortgages which have been granted in the last two years will be the worst affected because they were taken out at the peak of the property bubble, when houses were at their most expensive.
Since then, the bubble has burst and prices have declined 7.1 per cent in the last 12 months, according to property website Rightmove's House Price Index.
At the end of June, 3.7 per cent of buy-to-let mortgages were in arrears, compared to 2.9 per cent of ordinary residential mortgages
, S&P says, with more than half of them being taken out in 2006 and 2007.
"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 Standard & Poor's.
In the current economic downturn, "the current stock of buy-to-let loans will carry higher credit risk than the stock of loans to prime owner-occupiers." she added.
There are currently 1.1 million buy-to-let mortgages in existence, accounting for 11 per cent of the total of all mortgages, with the market having seen a huge surge during the property boom of the last decade.
Ambitious investors looking for a long-term savings solution have been facing mortgage arrears after taking out high loan to value mortgages on houses which are now losing value as mortgage rates
have simultaneously risen.
Coupled with this is a massive influx of rental accommodation as would-be sellers find they are unable to sell or unwilling to accept the deflated prices and opt to let their property instead of selling, flooding the market and pushing down rent, exacerbating the situation for landlords struggling to meet mortgage payments at a time when unemployment among tenants is likely to rise.
S&P estimates that "around 20-40 per cent 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 per cent."
In contrast to Standard & Poor's findings, the Council of Mortgage Lenders (CML
) found in August that arrears in the buy-to-let mortgage market were lower than the wider mortgage market, at 1.1 per cent compared to 1.33 per cent, and that the proportion of buy-to-let properties taken into possession was the same as ordinary properties, at 0.16 per cent.
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