Buy-to-let landlords feel the strain

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The Independent Online

The number of landlords in serious arrears on their mortgage leapt by more than 25 per cent in the final quarter of 2007, as the combined effect of a string of interest rate rises and a tightening in the credit markets began to take their toll on the buy-to-let sector.

According to new figures from the Council of Mortgage Lenders (CML), the number of landlords in arrears on their mortgage by more than three months rose to almost 7,600 during the final three months of last year, up from about 6,050 in the previous quarter. Year on year, the number of landlords in arrears was up more than 54 per cent.

Although sales of buy-to-let mortgages also slowed quarter on quarter, down more than 10 per cent on the previous three months, sales were up almost 11 per cent year on year.

Nevertheless, the CML maintained that rental demand remained strong in the sector, adding that levels of arrears were still well below the mainstream owner-occupier mortgage market.

“Tenant demand for private rented property remains strong, and buy-to-let is fulfilling an important role in helping to deliver an increased flow of high quality homes to rent,” Michael Coogan, the director general of the CML, said. “Buy-to-let has remained resilient in the face of the funding constraints that have affected the sector and the wider mortgage market.

“Many buy-to-let loans have interest rates linked to interbank rates, so may have seen hefty increases in payments when Libor rose to abnormally high levels in the second half of 2007. These are now likely to be returning to lower levels in line with the reduction in Libor rates since December last year.”

Mr Coogan added that he expected to see a continued healthy appetite for buy-to-let properties in 2008.

However, Michael Saunders of Citi European Economics sounded a note of caution over the figures. “It is unlikely that the full impact of the credit crunch is apparent in these data, given that the sharp tightening in mortgage lending standards only really occurred in the last couple of months of 2007,” he said.

“It must be remembered that housing slowdowns usually unfold gradually over quarters and years, and we will probably have to wait for data on [buy-to-let data in the first half of 2008] to see a clearer impact of the credit crunch. But there is a clear hint of worsening credit quality. The share of BTL mortgages in arrears is at a record high.

“Given that rental growth has stayed quite strong by all accounts, the rise in buy-to-let mortgage arrears probably is a side effect of increased borrowing costs. Worse probably lies ahead as the full effects of the tightening in lending standards by mortgage lenders – and resultant rise in mortgage lending spreads – comes through.”

Kelvin Davidson, a property economist at Capital Economics, added: “Two months have passed since these data were collected. In that time, mortgage lenders have only become more cautious and general economic and housing sentiment has deteriorated. In our view house prices will fall this year, and, against that backdrop, we expect a much more subdued buy-to-let sector.”

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