In its most recent Financial Stability Report, the Bank said these lower standards could lead to house price increases across the board and a broader rise in household indebtedness. UK household debt relative to income is already higher than most other developed countries.
In its report the BoE said that in the event of an economic downturn against a backdrop of rising interest rates landlords may struggle to make a profit from their investment and choose to sell up.
The sale of buy-to-let properties in a stagnant housing market could exaggerate drops in house prices.
An increase in customers defaulting on their mortgages because of tougher economic conditions could also lead to losses across lenders – damaging financial institutions’ capital position in the market.
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 FPC said it would continue to monitor the sector closely, with HM Treasury due to consult on tools for the FPC related to buy-to-let lending later in 2015. The committee plans to provide an in-depth evidence base on how buy-to-let could carry risks to the UK’s financial stability.
