Surg­ing UK rents will prop up buy-to-let land­lords against in­ter­est rate rises

Financial Mirror (Cyprus) - - FRONT PAGE -

While the prospect of in­creas­ing in­ter­est rates has many re-ex­am­in­ing their mort­gage af­ford­abil­ity, UK buyto-let (BTL) land­lords will ben­e­fit from sub­stan­tial af­ford­abil­ity buf­fers through ris­ing rental in­come, ac­cord­ing to a Moody’s In­vestors Ser­vice spe­cial re­port.

“With a 0.5% in­ter­est rate hike, the per­cent­age of BTL land­lords with in­suf­fi­cient rental in­come will in­crease to 0.4% from the cur­rent level of 0.2%, and those fac­ing tight af­ford­abil­ity will rise to 2.2% from 0.9%. How­ever if we take rental price ap­pre­ci­a­tion since loan orig­i­na­tion into ac­count, the pro­por­tion of land­lords with in­suf­fi­cient rental in­come and tight af­ford­abil­ity in a 0.5% rate in­crease sce­nario ac­tu­ally falls to 0.2% and 1.5%, re­spec­tively,” said Emily Rombeau, an­a­lyst at Moody’s.

“Voids are at a record low, so strong oc­cu­pancy lev­els will fur­ther sup­port the BTL mar­ket’s re­silience to mod­er­ate in­ter­est rate in­creases,” said Francesco Di Costanzo, as­so­ciate an­a­lyst at Moody’s.

With­out ac­count­ing for rent in­creases, Moody’s anal­y­sis in­di­cates that the pro­por­tion of BTL land­lords with tight af­ford­abil­ity buf­fers would rise to 2.2% from 0.9% cur­rently, if in­ter­est rates rise by 0.5%. The rat­ing agency fore­casts that the Bank of England base rate will start to rise pro­gres­sively at the end of Q1 2016 to about 1.0% by the end of Q3 2016, from 0.5% cur­rently. Low in­ter­est rates have prompted a grad­ual de­cline in ar­rears in UK res­i­den­tial mort­gage-backed se­cu­ri­ties (RMBS) backed by BTL loans since 2009.

The rat­ing agency’s re­search shows that land­lords’ abil­ity to pay their BTL mort­gages is fairly even across dif­fer­ent re­gions in the UK, de­spite a stronger rental mar­ket in the South of England. How­ever, BTL bor­row­ers lo­cated in the South of England will be slightly bet­ter po­si­tioned when rates start ris­ing. Tak­ing into ac­count rental price ap­pre­ci­a­tion, the pro­por­tion of BTL loans with in­suf­fi­cient rental cover is 5.5 times higher in Wales and Scot­land com­bined than in the South of England.

Sim­i­larly, the pro­por­tion of mort­gages with rental short­falls is 2.5 times higher in the North of England ver­sus the South of England, al­beit at neg­li­gi­ble lev­els— at 0.12% ver­sus 0.05%.

Moody’s cal­cu­la­tions de­ter­mine the in­ter­est cov­er­age ra­tio (ICR) for each BTL loan, or the gross rental in­come as a share of mort­gage pay­ments.

They in­di­cate that a cu­mu­la­tive in­ter­est rate rise of 0.5% would cause only a to­tal of 0.4% of UK BTL bor­row­ers to earn in­suf­fi­cient rental in­come to cover their mort­gage in­stall­ments, which is a very mar­ginal pro­por­tion.

Moody’s cal­cu­la­tions es­ti­mate the dis­tri­bu­tion of ICRs of the UK BTL RMBS sec­tor for var­i­ous in­creases in the bank base rate, based on either rental in­come at loan orig­i­na­tion or in­dexed in line with rental price ap­pre­ci­a­tion (as re­ported by the Of­fice of Na­tional Statis­tics).

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