BoE: Buy-to-let boom could endanger UK stability

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The expansion of the buy-to-let market could put the financial stability of the UK at risk, the Bank of England warns.

In its Financial Stability Report, published yesterday, the Bank says borrowers finding it easier to access credit and choosing to invest in buy-to-let pose a threat to the UK economy.

The report says: “Looser lending standards in the buy-to-let sector could contribute to general house price increases and a broader increase in household indebtedness.

“And 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. 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.”

The Bank says its financial planning committee will consult with the Treasury on how to build evidence of the risk to the UK, and will continue to monitor the sector closely.

According to Bank of England statistics, buy-to-let lending accounts for more than £1.2trn of the UK’s housing stock, 15 per cent of the stock of outstanding mortgages and 18 per cent of new mortgage lending.

It adds this could be further boosted by pensions freedoms but says it expects the impact to be small.

It says: “The ONS’s Wealth and Asset Survey suggests that only 7 per cent of 55–64 year olds would have both sufficient income in retirement to qualify for a buy-to-let mortgage and a DC pension pot large enough to provide a deposit of at least £20,000, which — assuming an LTV ratio of 75 per cent — would be required to buy a property worth £80,000.

“The majority of these retirees would already have had the flexibility to use their DC pension pots before the reforms were introduced, under an exclusion applied to individuals with other sources of income.”