Rental landlords under pressure from rising mortgage rates
Soaring interest rates are putting pressure on mortgage rental property owners, forcing some to consider selling properties or scouting for high-yield homes outside expensive parts of southern England, experts from the housing market.
Like most banks and building societies in the residential mortgage market, lenders to investor homeowners withdrew hundreds of fixed-rate loans in the days following last Friday’s “mini” budget.
Nearly 40 lenders have withdrawn their fixed-rate buy-to-let products since the Chancellor’s speech, according to buy-to-let mortgage broker Property Master. Angus Stewart, chief executive, said fewer choices for homeowners in the mortgage market “would have a further impact on the rising cost of mortgages”.
As these products return, they should come with much higher interest rates to reflect rising wholesale borrowing costs for lenders and market expectations of future increases in the main interest rate of the Bank of England.
“We expect a continued tightening of [lending] criteria given concerns about the market and economic conditions,” Stewart said.
Jeni Browne, sales director at brokerage Mortgages for Business, said a handful of lenders had already revised their fixed-rate offers, but at “incredibly expensive” interest rates of around 7%, down from around 2 % earlier this year.
The criteria used by lenders to judge the affordability of a buy-to-let includes a calculation of rental income as an interest expense ratio. This previously gave lenders and borrowers leeway for interest rate hikes. But some lenders have started to tighten this “rent-to-interest” calculation.
Those looking to remortgage with another provider may no longer pass that test, she added, although they can always switch to a new loan with their existing lender, known as a product transfer. “Some homeowners may find it difficult to remortgage in the future,” Browne said.
Aneisha Beveridge, director of research at estate agent Hamptons International, said the higher rates at which homeowners would be forced to remortgage would lead to losses for some of them.
Hamptons calculations revealed that a higher-rate taxpayer homeowner with an average yield of 6.1% who remortgaged last month would see their annual net profit fall by 72% to £884 from £3,198. Assuming last week’s half point rise in the Bank of England’s base rate is passed through to mortgage costs (before factoring in the impact of the ‘mini’ budget), this would reduce earnings average at £212 a year.
If base rates were cut from 2.25% to 2.5%, only those with properties earning more than 7% would continue to make a profit, the agent said.
“This is one of the main reasons London-based investors are increasingly buying rentals beyond the capital, targeting higher yielding areas. So far this year a record two third (66%) of London-based investors have chosen to buy rental property outside the capital, compared to just 26% a decade ago,” said Hamptons.
Besides selling or buying elsewhere, other options for landlords looking for higher returns include investing in multiple occupancy homes (HMOs) for higher rental income; change to ownership of a limited company in order to benefit from tax relief on mortgage interest; or curb their new purchase ambitions by buying a smaller home.
Landlords could also try to pass on some or all of their higher mortgage costs to their tenants. However, steep rent increases this year, combined with financial strains from soaring inflation, will limit their ability to do so.
Ben Beadle, chief executive of the NRLA, which represents landlords, said his research showed landlords would much rather have a reliable long-term tenant than risk being left with an empty house due to increases unbearable rent.
“But it tends to depend on individual circumstances and the ability of the owner to absorb [higher interest payments] or the ability of the tenant or the property to justify higher rents,” he said.
An increase in the number of homeowners requiring refinancing is expected over the next 12 months. A stamp duty surcharge for rental purchases in 2016 and new rules on borrowing constraints in 2017 led to a surge in purchases by landlords before the rules came into effect. Many of those who signed five-year fixed rate agreements at that time are now seeing their patches run out.
Of 1.3 million fixed-rate mortgages in June 2022 (out of a total of just over 2 million), about 220,000 were due to mature in the 12 months to June 2023, according to the body. UK Finance sector. Another 250,000 will mature in the 12 months to June 2024.
The typical borrower in the private rental sector uses interest-only loans, which amplify the effects of changes in interest rates on their monthly payments compared to those that repay principal and interest together. However, lenders prevent homeowners from borrowing more than 75% of a property’s value, making them less vulnerable to property price declines than, say, a first-time buyer with a 90 LTV mortgage. %.