Buy-to-let mortgages in Britain, especially those issued recently, are more risky than loan deals signed before the 2008 financial crisis, according to a Moody’s report published on Wednesday.
The ratings agency said one factor was that a new cohort of lenders, in their quest for market share, tend to issue loans with higher average loan-to-value ratios, laxer credit history constraints and longer maximum maturities than established lenders, degrading the quality of recent buy-to-let loans.
Pre-crisis loans have also benefited from rising house prices in a way newer ones will not, it continued. Loan-to-value ratios have fallen more on legacy loans thanks to this than they have on newer ones.
“An elevated market also heightens certain risks attached to loans originated toward the end or plateau of a housing cycle, which we believe is approaching,” said Rodrigo Conde, assistant vice president and analyst at Moody’s.
This means older residential mortgage-backed securities (RMBS) – bundles of such loans packaged together in one product that is sold on to investors – are likely to outperform newer ones, Moody’s said.
The discovery that huge volumes of RMBS were backed by millions of risky sub-prime mortgages in 2007-08 rocked the banking system and helped to spark the financial crisis.
In a separate report on Wednesday, the ratings agency said it expected banks to issue an additional 10 billion pounds ($14.2 billion) in RMBS in the next two to three years as they look to replace a cheap funding scheme from the Bank of England (BoE) that came to a close in February.
The Term Funding Scheme (TFS) was set up in 2016 to encourage banks to lend to customers at low rates by allowing them to draw funds at the prevailing UK base rate. UK banks borrowed 127 billion pounds under the scheme.
In its report, Moody’s also predicted lenders now face an increase in interest expenses of 800 million pounds as they look to refinance the BoE loans by increasing deposits and new secured funding including RMBS and covered bonds.