Determinants of Distress in the UK Owner-Occupier and Buy-to-Let Mortgage Markets

42 Pages Posted: 26 Oct 2018

Date Written: October 19, 2018

Abstract

The mortgage market has played a central role in the global financial crisis. One particularly pressing question surrounds the conditions under which mortgage borrowers enter distress, ie get into arrears or default. This paper develops a novel micro dataset from residential mortgage loans which UK banks and building societies have pre-positioned with the Bank of England for use as collateral in exchange for central bank funding. The dataset is used to investigate the determinants of borrower distress as a function of borrower and loan-level stock/flow characteristics over the loans’ lifetime in the buy-to-let (BTL) and owner-occupier (OO) mortgage markets. We find systematic differences between these two markets, controlling for a range of loan and borrower characteristics as well as macro variables. Our main result shows that, adjusting for affordability, the loan-to-value ratio is reliably more important for borrower distress in the OO market than for distress in the BTL market, contradicting McCann’s (2014) results.

Keywords: Distress, default, arrears, mortgage lending, loan level, micro data, United Kingdom

JEL Classification: C23, C55, G21

Suggested Citation

Lazarov, Vladimir S and Hinterschweiger, Marc, Determinants of Distress in the UK Owner-Occupier and Buy-to-Let Mortgage Markets (October 19, 2018). Bank of England Working Paper No. 760, Available at SSRN: https://ssrn.com/abstract=3272837 or http://dx.doi.org/10.2139/ssrn.3272837

Vladimir S Lazarov

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Marc Hinterschweiger (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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