Buy-to-let investors face negative equity

For the types of property they recently mortgaged, buy-to-let investors risk falling into negative equity quicker and deeper than owner-occupiers.



In a report on the sector, Standard and Poor's said that the rapid fall in the price of typical investor properties had already caused them a higher number of repossessions.



If house prices continuing falling at their current rate, the credit agency estimated that between 20% and 40% of investors will be in negative equity by mid-2009.



The estimate, based on S&P's analysis of 200,000 buy-to-let loans, a fifth of the total, compares to between 14% and 20% for the residential market by the same time.



It was arrived at based on figures the agency collated back in June, when 3.7% of landlords were in arrears, compared with 2.9% of normal house buyers.



Since then, lenders have recalled their generous mortgage deals – many of up to 100% of loan to value in the past two years, leaving owners struggling to meet repayments.



Experts say properties in strong buy-to-let areas, such as city-centre apartments, have been hit particularly hard, given their values have plummeted by up to 50%.



"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," said S&P analyst Kate Livesey.



"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 in a downturn."



The analyst said the problem area for the sector lies with buy-to-let loans made in the past two years which are now in negative equity thanks to falling house prices.



Separately, lenders' slowness to re-price their tracker mortgages or introduce lower fixed-rates for buy-to-let borrowers is giving landlords even less room for financial manoeuvre.



Following a historical interest rate cut, some lenders last week removed their tracker deals from the market and are yet to reintroduce them or fixed loans for investors.



Mortgage brokers are advising, however, that the initial delay does not mean lower-rate deals will not emerge, as buy-to-let usually takes a few weeks to catch up with the owner-occupier market.



The growing strains for investors are yet to hurt established landlords: of the 500 polled by researcher BDRC, almost all of them with 20 properties made a profit in recent months.



Half of them said they were about to add to their portfolios in the next three months and planned to request additional loans.



Yet among those investors with a single property, just 60% said profits were up, suggesting landlords with fewer properties are finding the downturn much harder to ignore.



"There are certainly signs in our latest quarter's research that the financial situation is improving for private landlords, many of whom have either increased rents, or are

planning to do so," said Mark Long, a director at BDRC.



"An increased number of people looking to rent is good news for private landlords - but in such an uncertain market, who can tell if that optimism will last even to the New Year?"