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A new report by the International Monetary Fund (IMF) has warned homebuyers in the UK that they risk becoming vulnerable to hikes in interest rates if they overextend themselves financially when applying for mortgages.

Chief of the IMF, Christine Lagarde, presented the report in London – and the IMF said that London homebuyers were especially vulnerable to the risks as a result of escalating house prices in the capital.

Last year, London house prices rose by nearly 18%, while across the UK the average increase in property prices was 9.1%.

The IMF is warning that the government’s Help to Buy scheme for first-time buyers and existing homeowners wishing to upgrade their homes may have to be ended earlier than planned to prevent a property bubble.

Some critics have already blamed the Help to Buy scheme for causing a spike in house prices – while other property experts claim that Help to Buy has enabled homebuyers to purchase properties at pre-credit crunch prices, both as a result of 5% deposits and the government underwriting up to 15% of the mortgage for a limited period.

Help to Buy enables buyers to purchase properties up to £600,000, however. The Bank of England has previously warned that this upper limit may have to be reduced – or even halved – to prevent borrowers overextending themselves financially and buying much more expensive homes than they can afford; particularly when mortgage repayment rates increase in line with any increase in the base rate.

The IMF report says that, so far, there are “few of the typical signs of a credit bubble”, however. The report goes on to say:

“Nevertheless a steady increase in the size of new mortgages compared with borrower incomes suggests that households are gradually becoming more vulnerable to income and interest rate shocks.”

The Chancellor has responded to the IMF report by saying that the Bank of England “should not hesitate” to take action to calm the property market if need be.

George Osborne said:

“We need to be alert to the build-up of debt in the housing market – we need to be alert when we see house prices rising.”

The IMF report recommends that emergency measures to cool the market could include a cap on borrowing – some lenders have already introduced more stringent criteria for assessing a borrower’s ability to repay their mortgage – including asking questions about how much money they spend on leisure activities such as gym membership or mobile phone top-ups.

There has also been a move among lenders to limit the amount an individual can borrow, with some lenders restricting borrowing to three or four times the borrower’s annual salary.

Duncan Lewis Housing Solicitors

Duncan Lewis is a leading firm of housing solicitors and can advise homeowners on property matters, including debt and mortgage repossession.

Duncan Lewis can also advise rental tenants on Local Authority housing, disrepair of rental property, housing possession, housing benefit, Landlord & Tenant disputes and unlawful eviction.

For expert help with housing law, contact Duncan Lewis housing solicitors on 020 7923 4020.