OREANDA-NEWS. Tenant demand will support UK buy-to-let (BTL) mortgages over the next 12-24 months, outweighing the immediate impact of changes to their tax treatment, Fitch Ratings says. However, the balance between fundamentals and regulatory interventions could change over the medium term, particularly if regulators tighten BTL underwriting criteria.

UK BTL mortgage performance has been strong, with arrears similar to those in prime UK RMBS deals rated by Fitch. One-month-plus arrears for UK BTL were 2.43% in January, compared with 2.35% for prime transactions. Landlords are typically more affluent than the wider UK population, and many BTL lenders have minimum income requirements for their borrowers.

Tenant demand for private rented property, which is a fundamental driver of BTL performance, has kept rents rising as housing demand outstrips supply. Real wage increases have enabled tenants to afford rent increases, but have not kept pace with house prices, keeping private rental demand high. Other factors include net immigration and the fall in social rental housing as a proportion of total UK housing stock.

The Office of National Statistics' (ONS) latest index of private housing rental prices found that rents rose 2.6% in the 12 months to February. All nine English regions, Wales, and Scotland recorded increases. Historically low void periods of below three weeks also indicate strong demand.

The new higher rate of stamp duty on the purchase of additional UK residential properties, and the start of the gradual reduction in tax relief that some landlords can claim on their finance costs from 2017, will affect landlord behaviour. Industry surveys suggest that existing landlords are less likely to add new properties when the tax changes take effect, and some may look to sell. Our gross new mortgage lending forecasts for UK incorporate the potential for the announced changes to slow the growth in BTL origination.

But fundamental conditions will support BTL performance in 2016-2017. Government initiatives to support home-ownership and boost housing supply will take time to bear fruit, and we forecast UK house prices to rise by 4%-5% this year. Demand will keep rental yields attractive even as property prices rise, and give affected landlords the option of raising rents, rather than forcing them out of the market. If the tax changes discourage new BTL entrants, this could be another constraint on availability that supports higher rents.

These expectations are incorporated in our stable/positive asset performance outlook for UK non-conforming mortgages in 2016.

Over the longer term, government and regulatory intervention will have a larger impact. Last week's Bank of England proposal on BTL underwriting standards includes affordability tests that would incorporate a minimum interest rate stress to 5.5% and an assessment of landlords' letting costs and tax liabilities, including the announced changes to mortgage tax relief.

The BoE said that this could restrict mortgage availability and/or profitability for some landlords, but that the BTL market would continue growing after implementation.

The proposal does not set limits on loan-to-value, debt-to-income, or interest coverage ratios. If these were adopted, this could make BTL less attractive for landlords if rental yields do not rise sufficiently to offset the impact of such affordability rules. This could have a knock-on impact on BTL lending volumes and RMBS prepayment rates.

Another potential longer-term risk would be a fall in migration from the EU following a Brexit (See 'Brexit: Short-Term Disruption For Most Sectors, Significant Longer-Term Risks.').