Consequential Debt: The Risk No One Talks About

Consequential Debt: The Risk No OneTalks About

For years we’ve been told there’s good debt and bad debt.

Good debt, apparently, is leverage. Debt secured against property that allows you to grow a portfolio, recycle your cash, remortgage repeatedly, and “never sell the asset”. Bad debt is everything else.

It’s a neat idea. It’s also dangerously incomplete.

Because debt itself isn’t good or bad. Debt is neutral. What matters is what happens to that debt when conditions change, and that’s the part almost nobody talks about.

That’s what I call consequential debt.

To understand why this matters, we need to be honest about the environment that shaped modern property thinking.

Since around 2009, interest rates have been exceptionally low. Property prices, despite the occasional wobble, have generally risen year after year.

Even when transaction volumes slowed, values rarely fell in any meaningful way, and when they did, they recovered quickly. There hasn’t been a sustained negative year in real terms for a very long time.

During that period, refinancing became routine. Valuations felt dependable. Lending remained broadly available. Entire strategies were built around remortgaging, pulling capital out, buying again, and repeating the process. The assumption — often unstated — was that refinancing would always be there when needed.

While conditions stayed favourable, this approach worked. But strategies built in exceptional conditions tend to break when those conditions stop being exceptional.

Most people ask whether debt can help them grow. The better question — and the one almost entirely ignored — is what that same debt turns into when the environment turns against them.

Consequential debt isn’t about whether a property makes money in good times. It’s about how easily that debt hands control back to the lender when conditions change. The consequences aren’t theoretical; they’re contractual.

They include loan-to-value breaches, refinancing refusals, covenant scrutiny, forced deleveraging, and in extreme cases, lender intervention or repossession. None of these require a market crash. They only require a reassessment of risk.

One of the clearest indicators of where risk really sits is lender behaviour. Banks reveal far more through pricing and terms than they do through marketing language. Look at where the best rates and most flexible lending sit, and you’ll consistently find it around 60% loan-to-value.

That isn’t accidental.

At roughly 60% LTV, a borrower can absorb meaningful valuation drops without breaching mortgage conditions. A 15% or even 20% fall in value does not automatically trigger lender concern. Historically, large drops take time to unfold, and markets tend to stabilise or recover before lenders need to act.

Above that level, the dynamics change sharply.

At 70–75% LTV, even small valuation shifts matter. A 5–10% adjustment can push a borrower into breach. Desktop valuations, stress tests, and underwriting policy changes suddenly carry real weight. Refinancing becomes time-sensitive, and control begins to shift away from the borrower.

This is the point at which debt becomes consequential.

A major reason this risk goes unnoticed is the faith people place in valuations. Valuations are not facts; they are opinions formed at a specific moment, shaped by comparables, assumptions, incentives, and lending appetite.

Market value doesn’t truly exist until a transaction happens. Until then, a valuation exists primarily to support lending — not to protect the borrower. If your debt only works at a certain valuation, then you don’t really own the asset; the valuation does.

This fragility is magnified in areas of the market that rely on income-based or commercial valuations, particularly HMOs. Unlike residential valuations, which are anchored to comparable sales and owner-occupier demand, commercial valuations are driven by models, yields, and assumptions.

A newly refurbished HMO may achieve an optimistic valuation when everything is fresh and lender appetite is strong. But when it comes time to refinance, the assumptions can change. Yields may harden, underwriting may tighten, and risk departments may take a very different view.

The result is often a valuation that falls back toward something more conservative, leaving the borrower exposed. Nothing illegal has occurred. Nothing reckless, necessarily. The issue is reliance on an opinion that was never robust enough to withstand scrutiny.

I’ve seen this before. During the 2008–2009 period, many buy-to-let borrowers found themselves breaching mortgage conditions not because they stopped paying, but because values were reassessed and lending behaviour changed. Banks needed to reduce risk and reclaim capital, and debt that had appeared safe suddenly became a problem.

We are already seeing early echoes of that cycle. Buy-to-let lending has tightened. Refinancing has become harder. Lenders are more selective, more cautious, and more willing to say no. Many landlords are now talking openly about reducing debt rather than expanding portfolios.

This isn’t fear-mongering, and it isn’t a prediction of collapse. It’s a recognition that debt reliant on favourable conditions is not resilient; it is conditional.

Consequential debt isn’t defined by how it performs in good times. It’s defined by how quickly control shifts when conditions change. Reducing debt may not be exciting, but resilience has always mattered more than scale.

The real question isn’t whether debt is good or bad. It’s at what point that debt stops being yours and starts being the lender’s.