Mortgage default, lending conditions and macroprudential policy: Loan-level evidence from UK buy-to-lets

Using a unique sample of mortgage loans for the UK buy-to-let market, we estimate a “double trigger” default model which links originating debt service and loan-to-value ratios to ex-post default. We investigate whether the relationship between these ratios and default can be informative in the calibration of macro-prudential limits. We find default increasing with originating loan-to-value and falling in the origination debt service ratio. A non-linear cubic spline model is used to identify threshold effects and we identify clear turning points in these relationships. This analysis could provide one input into supervisory considerations when setting limits in a macro-prudential context. In addition, we investigate how multiple loan portfolios interact with these thresholds with strong evidence to support tighter macroprudential restrictions on loans for second and subsequent properties.