A report by Standard & Poor's Credit Research recently captured headlines with a bold prediction'that ?if rents cannot be increased, 60.4% of [buy-to-let] loans originated in the 2014, 2015, and 2016 vintages will become loss-making [to the landlord]? by the time tax changes become fully effective.?

To perform this study, S&P analysts looked at data from BTL loans which have been securitised into RMBS investments?in a similar vein to the analysis done by Christian Bale's character in The Big Short.

If their assertion is correct, it has quite considerable implications for BTL investors. Fortunately, we?re able to replicate this analysis to see if we can refine the prediction.

For the past several years, UK Finance has been running a voluntary data survey for buy-to-let loans. Seventeen lenders participate in this monthly survey, meaning we have a live feed of about 85% of new BTL lending, going back to 2014. In comparison, S&P's analysis draws from a much smaller sample: 160,000 loans issued mostly between 2002-2016. This corresponds roughly to a 5% market share.

In replicating S&P's research, our data showed a decidedly more benign picture. For mortgages issued in 2014, 2015, and 2016, we see a very moderate increase in the percentage of loss-making mortgages throughout the tax-change phase-in, even with interest rates rising. For the most part, the proportion of loss-making mortgages remains firmly in single-digit territory.

There are several reasons why we don't see a substantial jump in loss-making mortgages. The main reason is that throughout 2014, 2015, and 2016, interest rates were driven down by intense competition in the mortgage market. A borrower taking out a 2 year-fix in 2014 could expect to refinance onto a rate around 0.9% lower in 2016. Likewise, borrowers in 2017 could refinance under cheaper deals than were available in 2015. This would have helped cushion borrowers against the higher tax liabilities they would incur starting in 2017.

We also suspect that the pessimistic view expressed in S&P's research may be underpinned by the assumption that loans issued in the past several years would be ineligible for refinancing, due to the PRA's new underwriting criteria. What is often overlooked is that the rules don't apply to pound-for-pound remortgaging'so as long as there is no additional borrowing, a customer should be able to refinance even if they don't quite meet the new criteria for stress rates.

Modelled into these results are several assumptions: that the borrower is a higher-rate tax payer, incurs tax-deductible business costs which amount to 19% of rent, and, until 2018, refinances every two years to a rate in line with typical market rates. In 2017/18 and beyond, it's assumed that borrowing costs for the landlord increase by 0.25% per year. In line with S&P's assumptions, rent levels are held constant throughout. Eight years of holding rent fixed is a major contributor to the model's prediction of 15% of 2014-issued mortgages becoming loss-making by 2012/22. In reality, it's quite rare for PRS rents to be fixed for such a long time.

It's key to note that, while this analysis is not comprehensive, it serves to illustrate that, in many cases, the impact of the tax changes can and will be mitigated by access to a competitive refinancing market.