Bank of England concerns over Buy to Let risks to Financial Stability

by Neil Patterson

3 years ago

Bank of England concerns over Buy to Let risks to Financial Stability

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Bank of England concerns over Buy to Let risks to Financial Stability

The Buy to Let (BTL) market has continued to grow rapidly and now accounts for 15% ofBank of England all outstanding mortgages and 18% of the total flow of new mortgages as reported in the Bank of England Financial Stability Report (see chart below).

chartThis recovery in BTL has been assisted by increased competition from lenders leading to falling lending rates and an increase in the number of BTL products available at 75% Loan to Value or greater. The Growth in BTL is supported by the continued movement of households to the Private Rented Sector driven by higher house prices as a ratio to income and a change to a more mobile demographic. In 2003 the Private Rented Sector accounted for 11% of households and in 2013 this had increased to 19%.

BTL could also receive extra stimulus from pension reforms with more flexibility for pensioners in the use of their pension pots, which could be used to purchase investment property.

The Bank of England report that BTL could pose a threat to financial stability:

“The Actions of BTL investors affect the broader housing and mortgage market as individuals compete to buy the same pool of properties. Looser lending standards in the BTL sector could contribute to general house price increases and a broader increase in household indebtedness. And in a downswing, investors selling BTL properties into an illiquid market could amplify falls in house prices, potentially raising losses givenĀ  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. BTL borrowers are potentially more vulnerable to rising interest rates, because loans are more likely to be interest only and extend on floating-rate terms, and affordability tends to be tested at lower stressed interest rates than owner-occupied lending”

“HM Treasury will consult on tools for the FPC related to BTL lending later in 2015, with a view to building an in-depth evidence base on how the operation of the UK BTL housing market may carry risks to financial stability. The FPC will continue to monitor this sector closely”


Neil Patterson

3 years ago

Yes I agree that in the wrong circumstances BTL could pose a risk and needs to be consider by the Financial Policy Committee, but I believe the real cause of potential instability in the housing market is a massive lack of supply.

It is this in-balance in the forces of Supply and Demand that pose the greatest risk.

Sam Addison

3 years ago

Presumably the risk that concerns them is a housing bubble which collapses. Personally, with BTL being less than 20% of market, and in principal buyers having some income from tenants, I see little likelihood of a catastrophic collapse. As landlords we just need not to overpay for properties and not to overleverage our assets. Nothing for me to worry about then.

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