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Buy-to-let mortgages set to underperform, says S&P

The U.K. buy-to-let residential mortgage loan sector will soon begin to underperform compared with the overall mortgage market, according to Standard & Poor’s.

The credit rating agency says the credit risk of the sector has been rising on the back of more unaffordable mortgages from 2006 and 2007. As a result it expects that the buy-to-let sector will soon begin to under-perform versus the overall mortgage market on aggregate measures.

Based on an analysis of around 200,000 securitised buy-to-let loans, which is approximately one fifth of the buy-to-let market, arrears were 3.7 per cent at the end of June. The Council of Mortgage Lenders currently places residential arrear averages at 1.33 per cent.

S&P estimates that around 20 per cent to 40 per cent of buy-to-let borrowers could fall into negative equity by mid-2009.

S&P surveillance credit analyst Kate Livesey says: “While older buy-to-let mortgages outperform similar loans made to prime owner-occupiers, newer buy-to-let mortgages are now underperforming, given looser initial underwriting standards and lower absolute growth in rental coverage since
origination.”

She added that this makes performance of the buy-to-let sector more sensitive to the currently difficult credit environment.

Livesey adds: “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.

“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.”

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