Abstract
This paper considers a vector error correction modelling (VECM) approach to identify determinants of mortgage portfolio arrears in the buy to let (BTL) segment of the UK mortgage market. Within this context, the alternative theories of the ability to pay view and the equity view are tested for the particular segment of the UK mortgage market. The empirical results suggest that UK BTL arrears are related to the dual-trigger approach where elements of the ability to pay view are combined with elements from the equity view to determine the aggregate arrears behaviour. From a behavioural perspective the results imply that borrowers' decisions may be influenced from personal biases and optimism around the long-run affordability and equity returns of their (BTL) investment decisions. Likewise, the 2008 crisis provided some indication that lenders may be affected from similar biases when making lending decisions. These findings may therefore be of practical use for mortgage portfolio managers and decision makers when considering policies for the BTL segment of the UK mortgage market.
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