Landlords Facing Negative Equity

by Peter Wakeford
Published on 18 November 2008
Landlords Facing Negative Equity

Negative equity could pose problems for up to 40 percent of landlords.

Buy-to-let investors are likely to suffer more from declines in house prices than ordinary homeowners, according to a new report by the credit ratings agency Standard & Poor's.

It predicts that if house prices drop 25 to 30 percent below peak levels, between 20 and 40 percent of landlords could fall into negative equity by the middle of next year.

In contrast, between 14 to 20 percent of homeowners are expected to have mortgage debts that exceed the value of their property in around six months' time.

Standard & Poor's believes buy-to-let investors are more vulnerable to negative equity, since 88 percent of buy-to-let mortgages are interest-only, while interest-only deals make up just 29 percent of mortgages held by owner-occupiers.

The report found that the repossession rate for buy-to-let properties is also greater than that for ordinary homes. Indeed, 3.7 percent of buy-to-let mortgages were in arrears at the end of June, compared to 2.9 percent of residential mortgages.

Kate Livesey, an analyst at Standard & Poor's, said: "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."

The warning comes as the Royal Institution of Chartered Surveyors is reporting that rents fell across the residential lettings sector in the third quarter of this year.

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