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

Robert Kelly and Conor O'Toole ()

No 04/RT/16, Research Technical Papers from 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.

Keywords: Macroprudential; Credit Risk; Mortgages; UK. (search for similar items in EconPapers)
JEL-codes: E32 E51 F30 G21 G28 (search for similar items in EconPapers)
Date: 2016-06
New Economics Papers: this item is included in nep-ban, nep-mac, nep-rmg and nep-ure
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