Buy-to-let could pose a threat to the UK economy

As reported in the Daily Telegraph, the UK’s incredibly successful buy-to-let housing market could pose a real threat to financial stability, the Bank of England has warned.

The Bank’s biannual Financial Stability Report warned that borrowers are finding it easier to obtain credit, and have potentially been putting themselves and the economy at risk by investing this money in buy-to-let properties.

The Bank stated: “Looser lending standards in the buy-to-let sector could contribute to general house price increases and a broader increase in household indebtness.”

“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.”

Those risks could be further increased as Britain prepares to increase interest rates for the first time since the financial crisis, even a small rise in rates could wipe out the income from a property.

“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.”

It is believed that the Bank is edging closer and closer to a rise in interest rates for the first time since the recession of 2008, as the UK economy remains on track to move back into inflation.

Buy-to-let borrowers now make up 15% of outstanding loans and 18% of the flow of new mortgages. This has been boosted significantly by new rules that enable retirees to hold their properties in a personal pension, ensuring that future capital gains are tax-free. It is also possible for savers to access all of their retirement funds from the age of 55, giving them a lump sum to put into investments such as the buy-to-let market.

The Office for National Statistics recently discovered that 42% of 20,000 respondents considered property to be the secret to creating the largest possible retirement fund, up from 32% in 2010.

It is believed that around £1bn has been withdrawn from pensions so far by an estimated 60,000, with many, many more expected to cash in in the future.