Tens of thousands of landlords are struggling to meet their mortgage repayments as the economic downturn devastates the buy-to-let market, according to a new report.

Moody’s, the ratings agency, released figures yesterday showing that 3.55 per cent of landlords were at least three months behind with mortgage payments in the first quarter of the year — compared with 0.95 per cent in the same period a year ago. Repossessions of buy-to-let loans had also risen marginally, to 0.18 per cent in the first three months of this year from 0.13 per cent in the first three months of last year.

There are about a million buy-to-let landlords in the UK, according to the Council of Mortgage Lenders.

The report focused on buy-to-let loans that had been packaged into residential mortgage-backed securities — bonds that lenders previously had traded in the money markets to raise new funds.

In a speech to the mortgage industry yesterday, Lord Turner of Ecchinswell, chairman of the Financial Services Authority (FSA), expressed fears that the buy-to-let market may produce “significantly higher arrears and defaults than the owner-occupier segment \”. He said that although early indications suggested that the level of repossessions may not equal that seen in the early 1990s, a surge in defaulting landlords would push losses up to the same level.

At the same conference, John Pain, the FSA managing director for retail markets, suggested that self-certification mortgages could be killed off. Self-cert loans, which became known as “liars’ loans” because homeowners were not required to provide proof of income, were aimed at self-employed borrowers but were open to abuse. About 45 per cent of loans were approved in 2007 without a check on the borrowers’ income, Mr Pain said. These were self-cert or fast-tracked business from existing customers.

Mr Pain said that the FSA had discovered evidence of irresponsible self-cert lending that it would address by requiring all applications to be accompanied by proof of income.

He told The Times: “Self-cert lenders run the risk of not testing the affordability criteria and may miss whether borrowers can actually pay their mortgage. We need to look at how self-cert has been working. While these loans are legitimate as a niche product for the self-employed and certain other borrowers, it should perhaps not be as widely available as it has been in the past.”

Official figures suggested that the pace of house price falls could be easing. House prices fell by 1.3 per cent in March, after a sharper drop of 2.8 per cent in February, figures from the Department for Communities and Local Government show.

However, the annual decline in house prices widened to 13.6 per cent from 12.3 per cent. The figures, which are based on a sample of completed sales from 60 lenders, show that flat-owners were the hardest hit, seeing the value of their property falling by 1.9 per cent in March. Terraced houses held their value the best, falling by only 1.1 per cent during the month.

Prime London asking prices have edged up for the fourth time in five months in April, suggesting that sellers are confident that buyers are returning to the market. The average asking price in prime London rose by £4,462, according to primelocation.com, the property website, an increase of 0.34 per cent. South West London showed the biggest improvement, with a monthly increase of 1.36 per cent. Wimbledon prices have risen by 4.4 per cent since March.

Central London, including areas such as Bayswater and West Kensington, showed a fractional increase, which Andrew Smith, head of research at primelocation, said was due to the areas’ popularity with international buyers. However, prices in Islington and City & Docklands, both badly affected by recent turmoil in the financial markets, continued to fall.

Tomorrow Nationwide Building Society, Britain’s third-biggest mortgage lender, will tighten its affordability criteria. It will use only half of any income-related bonuses, overtime or commission, rather than all of such extras, to calculate affordability.