A million buy to lets may slip in to negative equity

A million buy to lets may slip in to negative equity

9:47 AM, 12th May 2011, About 13 years ago

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A million buy to let properties could slide in to negative equity over the next two years if house prices keep falling, warns credit rating firm Standard and Poors.

Analysts at the agency reckon if house prices dropped by 5% this year and next year, 30% of the UK’s 3.1 million buy to let homes would be worth less than any mortgages owed on the properties.

This compares with a figure of around 17% for owner-occupiers.

The problem, according to Standard and Poors (S&P) is many buy to lets are highly leveraged in comparison to main homes.

Slipping in to negative equity could lead to property investors building up mortgage arrears as the sector is also more sensitive to the inevitable rise in mortgage interest rates because landlords have loans at a higher loan to value than other home owners.

“While record low interest rates and steady rents have pushed landlords’ debt servicing ability to healthy levels, our analysis suggests that interest rates rises – likely to start later this year – could cause the average debt service coverage ratio to fall by about 40% by the end of 2012,” said the S&P report.

“This means that buy-to-let borrowers would have less of a financial cushion to cover mortgage payments.”

The report also points out that in recent years, the buy to let market has reacted more sharply to credit problems – with arrears rising 500% after the credit crunch while quickly falling back by around a third.

S&P puts the arrears down to ‘payment shock’ for buy to let investors as discounted introductory periods for mortgages ran out, leading to landlords facing high standard rates because they could not refinance to another cheap deal as lenders imposed a credit squeeze.

Overall, says S&P, buy to let should perform well due to demand, but underlying financial problems may be revealed as interest rates start to rise.

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