Britain’s booming buy to let market could undermine the nation’s financial stability as mortgage interest rates are set to rise, says the Bank of England.
In the Bank’s latest financial stability report, worries that easy access to buy to let borrowing has triggered a thriving private rental sector that could impact on house prices and debt.
“Looser lending standards in the buy-to-let sector could contribute to general house price increases and a broader increase in household indebtedness,”
the Bank said.
“In a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages.”
The bank is also worried that inexperienced buy to let investors could see the money they collect as rents wiped out by mortgage interest rate rises.
This could lead to property investors having to raise cash from other resources, placing them in financial difficulties.
“This could be a particular concern in a rising interest rate environment, if properties become unprofitable given higher debt-servicing costs,”
says the report.
“Buy-to-let borrowers are potentially more vulnerable to rising interest rates because loans are more likely to be interest-only and extended on floating-rate terms, and affordability tends to be tested at lower stressed interest rates than owner-occupied lending.”
Buy-to-let borrowing accounts for 15% of outstanding mortgages and 18% of new mortgages.
The Financial Conduct Authority, which regulates mortgage lending in the UK, is ready to put the brakes on some buy to let lending by bringing in new rules for first-time landlords from next year.
These landlords will have to prove they can finance buy to let loans from earnings rather than property rents.