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Falling rents in London and the South East could hit bonds backed by buy-to-let mortgages, Moody’s has warned.

Rents in London fell by nearly 5 per cent in February compared to a year earlier, triggering the first overall fall in rents in England, Scotland and Wales in six years, according to Countrywide data.

“If yields were to fall much below current mortgage rates, leveraged BTL investors could face ongoing negative cash flow,” the rating agency said.

Buy-to-let mortgages, which are highly concentrated in the South East of England, are often funded through securitisation markets, in which the debt is packaged together and sold as bonds to capital markets investors. These investors in turn rely on the cashflows from the underlying borrowers investing in buy-to-let properties.

A fall in yields could lead to increase arrears and defaults from underlying borrowers, Moody’s said, adding that house prices for buy to let properties – to which bond investors would have recourse in a default – are at higher risk of declining.

It also pointed to reductions of mortgage interest rate deductibility on high taxpayers, which are being phased in over the next three years, and already “stretch BTL investors cash flows”.

Moody’s has identified 17 buy-to-let securitisations in which more than half of loans are exposed to London and the South East. It says a further fall in rental yields would be a “credit negative” for such transactions.

Moody’s data shows around a quarter of all UK buy-to-let loans are in London, with a further 15 per cent in the South East.

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