The Bank of England (BoE) has released its Financial Stability Report warning that the UK’s buy-to-let property market could be putting the economy at risk.
With credit easier to come by, borrowers are increasingly investing in buy-to-let properties, which the BoE says could be the source of personal and national financial instability.
The Report said: ‘Looser lending standards in the buy-to-let sector could contribute to general house price increases and a broader increase in household indebtedness.
‘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.’
With rumours that the BoE could finally be preparing to raise interest rates from their record long-term low, the Report also warns that property price fluctuations could make the situation even more precarious.
It continues: ‘This could be a particular concern in a rising interest rate environment, if properties become unprofitable given higher debt-servicing costs.
‘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’.