Buy-to-let boom could spark market crash when rates rise, Bank of England warns
07-04-2015
BRITAIN'S buy-to-let boom could trigger a house price crash and economic crisis when interest rates rise, the Bank of England has warned.
By Lana Clements
Buy to let signs seen lined up
PA Wire
Britain's buy-to-let sector is booming
The central institution fears that investment properties could fast become unprofitable when rates rise - a move expected later this year or next.
Mortgage costs would increase in line with central rates and could cause problems if tenant rent no longer covers the repayments.
It comes as lenders seek to reduce their risk exposure to the landlords after months of ploughing the market with cheap credit, including interest-only mortgages that are now largely off limits to ordinary buyers.
In its financial stability report the Bank 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."
Landlords could default on mortgages if they are not able to sell properties that are losing money, the report added.
"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."
Virgin Money today announced that it is pulling out of the market for professional landlords.
The lender is to cut the maximum number of properties that can be held in a customer's portfolio from ten to four and will also apply a maximum cap value of £2million.
Daniel Bailey from mortgage broker Middleton Finance said: "A maximum of 10 properties could potentially see Virgin attracting the professional landlords with larger portfolios."
A spokesman confirmed the changes to Express.co.uk and said they will take affect from July 8.
He said: "We're realigning our policy to make sure we're focused on our core market, which is the amateur landlord.
"Virgin Money is committed to supporting Buy To Let and we're not moving away from the market."
There is growing speculation that George Osborne could target buy-to-let tax breaks when he unveils his emergency summer Budget next week.
As more people have invested in the market since the economic crisis of 2008, the cost of tax perks offered to investors have soared.
The most recent HMRC figures revealed that landlords benefited from £14billion tax-breaks in 2013, which includes the ability to offset the cost of mortgage interest, fees and home insurance.