UK BTL Sector: Treading Turbulent Waters

This commentary by DBRS Morningstar provides a comprehensive analysis of BTL loans within UK residential mortgage-backed securities (RMBS) and explores the potential impact of various factors on the loans and transactions.

DBRS Morningstar analysed 402,432 loans spanning 36 UK residential mortgage portfolios available in the European Datawarehouse (EUDW). Within this dataset, 72,059 loans were specifically classified as BTL loans, encompassing 29 UK residential mortgage portfolios.

Key findings include
• For the sample loan analysed, over the next 17 months, leading up to December 2024, about 17% of BTL loans are expected to undergo resetting. For these BTL borrowers, this could translate to a 52% increase in their monthly mortgage payments, amounting to an increase of GBP 657 in the mortgage payment per month.
• The majority of landlords have low loan-to-value ratios (LTVs), and are generally shielded from rising interest rates, as they lower interest costs, reduce payment shock risk, and improve loan affordability. Additionally, BTL investors, having profited from very low teaser fixed rates and rising rents in recent years, may have more buffers, albeit with a likely decrease in profit.
• Those landlords with BTL mortgages featuring higher LTVs, particularly in urban areas with lower rental yields, face a higher degree of financial risk.
• We anticipate a further increase in BTL mortgage arrears and a probable reduction in BTL origination volumes, which may lead to higher rates of home repossessions.