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Lending Conditions and Loan Default: What Can We Learn From UK Buy-to-Let Loans?

Author

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  • Kelly, Robert

    (Central Bank of Ireland)

  • O'Toole, Conor

    (Central Bank of Ireland)

Abstract

This research considers one approach as to how originating lending conditions on debtservice ratios and loan-to-value ratios affect future default risk in the “Buy-to-Let” market. Using a sample of mortgage loans for the UK, we estimate a “double trigger” default model, with originating equity and affordability terms. We find default increasing with originating loan-to-value (OLTV) and falling in original rent coverage (ORC). A non-linear cubic spline model is used to identify threshold effects in the relationship between OLTV, ORC and default, with loans of OLTV greater than 75 and ORC below 1.5 showing a large increase in default risk. These results provide empirical evidence for the non-linear nature of default in these origination terms and provides useful insights into for understanding OLTV and ORC limits in a macro prudential context. In addition, we investigate how multiple loan portfolios interact with these thresholds. While there is no impact on the main findings of 75 and 1.5, there is strong evidence to support tighter restrictions on loans for second and subsequent properties.

Suggested Citation

  • Kelly, Robert & O'Toole, Conor, 2016. "Lending Conditions and Loan Default: What Can We Learn From UK Buy-to-Let Loans?," Research Technical Papers 04/RT/16, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:04/rt/16
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    References listed on IDEAS

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    Cited by:

    1. Donnery, Sharon & Fitzpatrick, Trevor & Greaney, Darren & McCann, Fergal & O'Keeffe, Micheal, 2018. "Resolving Non-Performing Loans in Ireland: 2010-2018," Quarterly Bulletin Articles, Central Bank of Ireland, pages 54-70, April.
    2. Gaudêncio, João & Mazany, Agnieszka & Schwarz, Claudia, 2019. "The impact of lending standards on default rates of residential real estate loans," Occasional Paper Series 220, European Central Bank.
    3. Keenan, Enda & Kinghan, Christina & McCarthy, Yvonne & O'Toole, Conor, 2016. "Macroprudential Measures and Irish Mortgage Lending: A Review of Recent Data," Economic Letters 03/EL/16, Central Bank of Ireland.

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    More about this item

    Keywords

    Macroprudential; Credit Risk; Mortgages; UK.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F30 - International Economics - - International Finance - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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