The Bank of England has warned that buy-to-let “could pose a risk to financial stability” in the event of rising interest rates.
In its latest financial stability report, released on 1 July, the Bank of England commented that more relaxed lending standards in the buy-to-let sector could contribute to house price inflation and a rise in household indebtedness, as both investors and owner-occupiers compete for the same pool of properties.
According to the report, the buy-to-let market expanded by 8% in the year to Q1 2015, and now accounts for 15% of all outstanding mortgage loans. The Bank of England also remarked on a growing appetite for risk in buy-to-let underwriting, with the number of buy-to-let products at 75% LTV (loan-to-value) and higher having increased steadily over the last two years.
The report said:
“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 warned that rising interest rates might prompt investors to sell as their investments became less profitable, which could cause prices to fall and potentially harm the wider housing market.
Later this year, HM Treasury will begin a consultation on granting new powers to the Bank of England’s Financial Policy Committee (FPC) that will allow it to limit buy-to-let lending by restricting high-LTV and low-interest coverage loans.