Could Buy-to-Let Boom Pose Serious Threat to the Economy?

Figures show more and more people are taking on a second mortgage to buy an additional property to rent out. The Bank of England has voiced its concerns in this area as more people are looking to make money from a small number of rental properties. According to information coming from Threadneedle Street, there are few restrictions on granting mortgages on a buy-to-let basis. This often makes it easier for people to get mortgages for one or more buy-to-let properties than it would be if they were looking for their own property. Why might buy-to-let boom in these mortgages be a danger? We are all aware of the superbly-low interest rates in place at the moment. However they will not stay that low for ever. Instead they will eventually rise, and speculation surrounds a rise at some point in 2016. While the rates will not go up by a huge degree overnight, they will increase from the level they are currently at. When this happens it will have a far different effect on the buy-to-let market than it would have on the normal housing market. Unprofitable properties Since people purchase buy-to-let properties with the intention of renting them out and making a profit, they get a huge benefit from having low interest rates on those mortgages. As soon as the rates rise, so does each mortgage payment they have to make. This could have one of two effects. Either rents will rise as well (although this could be unsustainable in the long term) or landlords will find it difficult to keep up with their mortgage payments. This is particularly troublesome since they are likely to have their own mortgage to pay as well as one or more buy-to-let mortgages. Even a relatively modest 1% rise in interest rates could be catastrophic for some. House price crash House prices are relatively healthy at the moment but according to the Bank of England this may not be the case when interest rates rise and it is a when rather than an if. However they could fall significantly when the rates rise if landlords find themselves unable to maintain those mortgage payments. In this situation more and more landlords could opt to try and sell their properties rather than keep running them at a loss. This might happen if the amount gained in rental payments does not cover the amount the landlord has to pay for the mortgage each month. If more properties flood onto the market house prices are likely to fall as a result. It also means those with one or two properties that are no longer making money as they did could end up with significant losses if the value of those properties has gone down as the mortgage payments go up. The danger that some landlords have interest-only mortgages also means a greater risk in losing money or defaulting on the mortgages in some cases. Clearly this could be a time bomb just waiting to go off.

Published on 6 July 2015

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