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Buy-To-Let Borrowers At Greater Risk Of Negative Equity

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Even mild declines in house prices over the next two years could place over 30% of buy-to-let borrowers in negative equity, Standard & Poor’s has warned.

A report by the credit agency says if house prices fell by 5% in 2011 and a further 5% in 2012, 30% of buy-to-let loan balances would be in negative equity, compared to 17% for owner-occupier loans, which it says would reduce buy-to-let borrowers’ financial flexibility and therefore risk a rise in arrears.

Standard & Poor’s puts the difference between the two sectors down to the higher average LTV ratio among buy-to-let loans in the sample it used and the fact that buy-to-let LTV ratios are concentrated in a relatively narrow range.

The paper states that, in the short term, the credit performance of buy-to-let property owners is likely to continue to be more closely affected by changes in interest rates than that of owner-occupiers.

It says: “While record low interest rates and steady rents have pushed landlords’ debt servicing ability to healthy levels, our analysis suggests that interest rates rises - likely to start later this year - could cause the average debt service coverage ratio to fall by about 40% by the end of 2012.

“This means that buy-to-let borrowers would have less of a financial cushion to cover mortgage payments.”

The report adds that in the near term, the buoyant rental market will continue to support buy-to-let borrowers, but interest rate hikes are a risk on the horizon.

Seems that the meme is getting into the mainstream.

A lot of people will be losing their shirts, and a lot already have.

That's a lot of angry, bitter people.

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Seems that the meme is getting into the mainstream.

A lot of people will be losing their shirts, and a lot already have.

That's a lot of angry, bitter people.

I think the time has long since past to batten down the hatches, if you haven't done so already, there is probably no way back.

The storm is close

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I'm sure that I'll shed a few tears for the BTL vultures once they go to the wall. laugh.gif

Yeah you'll be laughing till you cry.

I heard rumours about a local one .. But yet to see any impact or hear it confirmed... :)

Edited by SarahBell

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Seems that the meme is getting into the mainstream.

A lot of people will be losing their shirts, and a lot already have.

That's a lot of angry, bitter people.

So what will the real implications be?

Presumably if they are in negative equity it will be harder for them to refinance at the end of their deals and the banks have no reason to be overly sympathetic to 'investors' rather than owner occupiers?

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So what will the real implications be?

Presumably if they are in negative equity it will be harder for them to refinance at the end of their deals and the banks have no reason to be overly sympathetic to 'investors' rather than owner occupiers?

Depends on how many can still keep servicing the debt. Negative equity is only a problem if you have to sell or if it's time to remortgage to a new deal...

Margin call anyone?

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And ironically I see a Bloomberg article today that tells us ...

"The value of loans taken out by private landlords increased 22 percent last year, Council of Mortgage Lenders data shows."

http://www.bloomberg.com/news/2011-05-10/buy-to-let-market-revives-as-britons-choose-bricks-and-mortar-over-shares.html

Buy-to-Let Market Revives as Britons Choose Bricks and Mortar Over Shares

Mike Valente raises his hand to bid on a second house in a property auction in London, moments after paying 130,500 pounds ($215,000) for another home he plans to rent out.

“Money does so poorly in the bank at the moment,” the 53- year-old dentist said in an interview at the auction house on Tavistock Square where he bought the properties last month. “Buy-to-let is coming back because land and houses are cheap, and bricks and mortar won’t go to the wall like shares.”

Purchasers like Valente are fueling a rebound in the U.K.’s private rental market, known as buy-to-let, as they take advantage of falling prices and low interest rates. The value of loans taken out by private landlords increased 22 percent last year, Council of Mortgage Lenders data shows. Mortgages obtained by all types of homebuyer fell 5.1 percent, according to the Bank of England.

“Transactions are up, but buy-to-let landlords and cash investors are propping up the figures rather than owner- occupiers,” said Nick Leeming, business development director of property website Zoopla.

Buy-to-let transactions played a big part in the rise and fall of the U.K. real-estate market during the previous decade. The number of these deals increased 19-fold in the 10 years to 2007 -- when average home prices doubled -- as TV programs such as Channel 4’s “Location, Location, Location” and investment clubs encouraged Britons to become landlords. In the two years through 2009, mortgages for rental properties fell by 73 percent compared with a 52 percent drop in home loans overall.

Arrears, Repossessions

In 2008, mortgages to buy rental properties accounted for 18about 10 percent of all home loans and 15 percent of those that were at least three months delinquent. Last year, lenders repossessed 5,900 buy-to-let homes, or 16 percent of the total, also higher than its share of the mortgage market.

Buy-to-let deals became identified with speculation during the boom years, though the market has deeper roots. They became attractive to private investors after the government enabled more companies to provide mortgages and introduced legislation on fixed-term tenancies in the 1980s. Also, mortgage-interest payments and management costs linked to these investments are treated as tax-deductable business expenses.

“Buy-to-let has become part of pension planning for a lot of people,” said Grenville Turner, chief executive officer of Countrywide Plc, the U.K.’s largest real estate and mortgage broker.

Steady Climb

Privately owned rental homes have increased as a proportion of all residential properties every year since 1999, rising from about 10 percent to almost 16 percent. That may climb to 20 percent by the end of 2016, real estate adviser Savills Plc said in a report today.

“Our prognosis for the private rented sector as a whole remains extremely bullish,” said Yolande Barnes, the broker’s head of residential research.

About 83 percent of U.K. residential investors owned 10 units or less as of March 31, the Association of Residential Letting Agents said. Unlike the U.S., France and Germany, institutional investors have virtually no presence in the U.K.’s private rental market.

“In the near term, the buoyant U.K. rental market should continue to support buy-to-let borrowers, but interest rate rises are a risk on the horizon,” Mark Boyce, a credit analyst at Standard & Poor’s, said in a report yesterday.

Crisis Benefit

Britain’s economic crisis has made buy-to-let investments more attractive. The Bank of England has kept its benchmark interest rate at a record low of 0.5 percent for 27 consecutive months, reducing financing costs and improving returns.

Restrictions on mortgage lending have prompted more Britons to rent homes. The number of English households living in private rented accommodation increased by 1.1 million in the six years through March 2010, government figures released two months ago show. The private rented sector represents the highest proportion of England’s housing stock in 35 years, according to the data.

Average home prices in England and Wales are 12 percent below the peak reached in November 2007, according to sales- figure prices compiled by the Land Registry.

“The rental sector is strong, mortgages are available and property is out there so that a good quality investor can make good, sensible purchases,” Countrywide’s Turner said.

The value of the benchmark FTSE 100 Index (UKX) of U.K. stocks fell 5.2 percent in the decade ending in 2010, although reinvested dividends lifted annual returns for stock market investment to 3.2 percent for the period, data compiled by Bloomberg show.

Returns on Rentals

Gross rental income for homes averaged about 5 percent of purchase prices in the first quarter, according to a February survey of members of the Association of Residential Letting Agents. The net income return is less if management expenses and lost revenue from non-payment is included.

In parts of the country where accommodation is in short supply, rents are rising quicker than property prices. In the London region, average residential rents rose 16 percent last year, Savills said.

The average gross rental income of the 3,100 tenant- occupied properties sold in auction last year was 8.5 percent, based on hammer prices, according to David Sandeman, managing director of the Essential Information Group, which collects data from U.K. property auctions.

Expanding Investment

Valente says he expects to earn 800 pounds a month from his latest purchase, a two-bedroom house. The home is his fifth in the English village of Fobbing, about 25 miles (40 kilometers) east of London, which he says is an “overlooked opportunity” because local employment is strong. He wouldn’t say how many properties he owns in total.

Buy-to-let investments are “attractive in the medium and long term as rental incomes will continue to increase as the sector gets ever stronger,” Turner said. “On top of that, there’s capital gain.”

By the end of last year there were 1.3 million buy-to-let mortgages outstanding worth 152 billion pounds, representing 12 percent of outstanding home loans, according to Council of Mortgage Lenders data.

Demand from prospective landlords is “resilient and loan performance has improved,” said Michael Coogan, CML’s director general.

Institutional investors own about 3.76 million apartments in the U.S., according the world’s biggest real-estate adviser, CB Richard Ellis Group Inc. The U.K. is trying to attract large- scale investment in the market by lowering stamp duty taxes for buyers of multiple homes.

“You couldn’t buy the land and build this property for much less than I got it for,” said Valente. “Shares can make you a millionaire overnight, but property is safe and steady.”

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From the article.

Buy-to-let investments are “attractive in the medium and long term as rental incomes will continue to increase as the sector gets ever stronger,” Turner said. “On top of that, there’s capital gain.”

Well

Gross rental income for homes averaged about 5 percent of purchase prices in the first quarter

So net thats at best what you could get in a bank. Also

Average home prices in England and Wales are 12 percent below the peak reached in November 2007, according to sales- figure prices compiled by the Land Registry.

So thats a capital gains fail as well. Yet they end the article with "property is safe and steady.”

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  • 221 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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