The Financial Stability Report by the Bank of England has highlighted a potential risk to financial infrastructure. In the report, it stated the surging buy-to-let industry could ‘pose a risk to financial stability’.
The scope for catastrophe is enormous. More than two million UK residents are now landlords. That rings in at six-hundred-thousand more than before the 2008 financial crash. To compare figures, in the year 2000, just two-percent of the UK’s mortgages were buy-to-let’s. Fast forward to our present year & buy-to-let mortgages account for fifteen percent of all home loans. There is also an astounding variety, with nine hundred buy to let mortgage products available.
New buy-to-let mortgages account for eighteen percent of all new mortgages. Traditionally commercial, buy to let mortgages are also given a form of tax break. Landlords can enjoy tax deductible interest payments on their buy to let mortgages. Tax must be paid on any rental income received, however you can also deduct your mortgage payments. Residential home owners do not enjoy such benefits.
The Financial Stability Report also documented a price war amongst lenders, where mortgage rates were being cut to lure Landlords. Inarguably, the favorability of the taxing system as well as the banks towards buy to let mortgages have fuelled demand. It has aided the boom of buy to lets, leading to the Bank of England to identify the scope for the boom to turn to a bust.
Lured by the lucrative income, many prospective Landlords do not fully comprehend the sphere of costs a buy to let entails. Besides factoring mortgage payments & highly inter-changeable yields, Landlords must consider tenant arrears as well as maintenance & repairs to the buy to let property. Another aspect could be letting agency & management fees.
Buy-to-let mortgages are also extremely vulnerable to rising interest rates. The current interest rate value of 0.5% is life support to many Landlords. Should the rates rise by even one percent, a Landlord would see dramatic increases in annual interest rate bills. Interest rates are predicted to be increased by Spring 2016. This would devastate profit margins for many Landlords. Many could be pressurised to go to sale.
As a result of a rise in interest rates, properties could flood the market. Many could find themselves in negative equity, or worse, unable to sell a property that is rapidly draining finances. This could threaten a Landlords personal residence & lead to a depletion in personal savings.
The Bank of England highlighted the apprehension, stating ‘investors selling buy-to-let properties into an illiquid market could amplify a fall in house prices…’
Having fuelled higher house prices on its ascent, the buy to let boom could fuel lower house prices on its descent to a bust. Agreeing to sell a buy to let involves none of the sentiment involved in your own home. Banks could be likely to be less tolerant with any customers in arrears when the property at stake is an investment & not the borrowers own home.
The alternative to a buy-to-let bust is the continuing division of classes we are experiencing currently. On the one hand those who own their own home as well one or more buy-to-let properties & on the other those condemned to a lifetime of renting.
At Rescue My Properties, we recognize the issues facing Landlords in the modern market. We understand many Landlords wish to prepare for the rise in interest rates, before the options is removed. We assist Landlords in developing a plan for their future finances with protection of assets, consolidation & growth. Call 0207 127 6536 for a free consultation that could save you thousands.
Be ahead of the buy-to-let game, before the boom can turn to a bust.