Buy-to-let threatens UK economy

The Bank of England has warned that the booming buy-to-let market poses a threat to the financial stability of the UK.

It warned that borrowers may be putting themselves and the economy at risk by investing too much money in buy-to-let properties, according to its Financial Stability Report.

The Bank said: "Looser lending standards in the buy-to-let sector could contribute to general house price increases and a broader increase in household indebtedness.

"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."

It warned that these risks could be amplified as Britain prepares to raise interest rates for the first time since the financial crisis.

Even a small rise in rates could wipe out the income from a property.

The Bank said: "This could be a particular concern in a rising interest rate environment, if properties become unprofitable given higher debt-servicing costs.

"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."

Ian McCafferty, a member of the Monetary Policy Committee, warned that the Bank is edging closer to a rise in interest rates for the first time since the financial crisis, as the UK economy remains on track to move back into inflation.

Buy-to-let borrowers now account for 15% of outstanding loans and 18% of new mortgages.