Buy-to-let landlords at more risk of negative equity

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by Lin Freestone

Ratings agency Standard & Poor’s has estimated that between 20% and 40% of landlords could be in negative equity next year if the prices of property fall by up to 30%, as predicted. If this happens, they will owe more on their property than it is worth.

Landlords who entered the market in the past two years are at a far higher risk as a result of lenders’ lax lending practices and easy mortgage availability in the run-up to the credit crunch.

According to Standard & Poor’s, 88% of buy-to-let mortgages were taken out on an interest-only basis. It is estimated that almost half of these have a Loan to Value of 80% or more.

These figures compare unfavourably with homeowners, of whom between 14% and 20% are expected to have mortgage debts that exceed the value of their property by the middle of next year. Interest-only deals make up just 29% of mortgages held by owner-occupiers.

The repossession rate for buy-to-let properties is greater than that for ordinary homes. At the end of June 2008, 3.7% of buy-to-let mortgages were in arrears, compared to 2.9% of residential mortgages.

Landlords who invested in city centre new-build flats have suffered the most from falling prices. There is also increased competition as falling values are forcing owners to rent rather than sell, leading to a glut of rental properties on the market.