The booming buy-to-let market and ease investors can secure mortgage loans could undermine the UK economy when interest rates rise.
The Bank of England has issued a warning in their Financial Stability Report about borrowers securing easier access to credit.
If they invest this extra money into buy-to-let properties, it could create increases in house prices and also raise the general level of indebtedness. Buy-to-let borrowers are more vulnerable to rising interest rates as loans are mostly interest-only mortgages.
Affordability tends to be tested at lower stressed interest rates than owner-occupied lending, such as first time buyers, home movers and remortgage buyers.
Buy-to-let market could be dangerous
Even during a downswing, the Bank of England thinks that buy-to-let is dangerous, saying that “investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages”.
Essentially buy-to-let properties being bought during a house price collapse would only aggravate the problem, further pushing prices downwards and also lowering the owner’s equity in the house.
These risks could be accentuated further given that the UK will soon be raising its interest rates, which would affect the buy-to-let borrowers a lot, given that most of their loans are likely to be interest-only mortgages.
Pension reforms may increase the risk
This is a problem for the UK economy as whole because buy-to-let borrowers are 15% of outstanding loans, and 18% of the flow of new mortgages.
If such a large proportion of people are unable to pay their debts due to rising interest rates, it could create a crash in the UK economy.
A large proportion of the 15% are retirees, since the introduction of new rules that allow retirees’ to withdraw all of their pension funds at age 55 result in retirees dominating the buy-to-let realm.
Existing homeowners could consider let-to-buy where the remortgage buyer rents their existing property while buying a new home as their main residence.
However this could accelerate the UK into another crisis, since banks are now offering more buy-to-let loans, up 15% in the 2 months since the pension reforms were published.
Greater competition from buy-to-let investors has increased the purchase price and reduced the supply of suitable properties for first time buyers or home movers.
In addition there is no control on whether retirees are going to live long enough to pay back their debts, even more so now that buy-to-let mortgages can last until the borrower is 105 years old.
Older homeowners with considerable value in their property offers the equity release mortgage buyer access to cash to improve your quality of life or reduce inheritance tax owed by your beneficiaries.
What are your next steps?
Call our LCM mortgage brokers if you are a buy-to-let landlord with a property, remortgaging and want the best mortgage deal, buying your first home or you are planning to move home.
For equity release buyers our London City Mortgage advisers can recommend lifetime mortgages allowing you to receive cash from your home to spend on anything such as pay for care at home or even gift to a family member or friend.
Start with a free mortgage quote or call us and we can take your details. Learn more by using the mortgage monthly cost calculators, property value tracker chart and equity release calculator.
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