Buy-to-let landlords under strain from mortgage rate rises

Soaring interest rates are piling pressure on mortgaged buy-to-let landlords, forcing some to consider selling properties or seeking higher-yielding homes outside the expensive regions of southern England, housing market experts say.

Like most banks and building societies in the residential mortgage market, lenders to landlord investors have withdrawn hundreds of fixed-rate loans in the days following last Friday’s “mini” Budget.

Nearly 40 lenders have pulled 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 landlords’ dwindling choices in the mortgage market “would have a further impact on the rising cost of mortgages”. 

As these products return, they are expected to come with much higher interest rates to reflect rises in wholesale borrowing costs for lenders and market expectations of future increases in the Bank of England’s main interest rate.

“We expect to see a continuing tightening of [lending] criteria given the concerns about the market and economic conditions,” Stewart said.

Jeni Browne, sales director at broker Mortgages for Business, said a handful of lenders had already repriced their fixed-rate deals, but at “incredibly expensive” rates of interest at around 7 per cent, up from around 2 per cent earlier this year.

The criteria that lenders use to judge buy-to-let affordability include a calculation of rental income as a ratio of interest costs. This previously gave lenders and borrowers headroom for rises in interest rates. But some lenders have begun toughening up this “rent-to-interest” calculation.

Those looking to remortgage with another provider may no longer pass this test, she added, though they would still be able to move on to a new loan with their existing lender, known as a product transfer. “Some landlords may find that they struggle to remortgage going forward,” Browne said.

Aneisha Beveridge, research director at estate agent Hamptons International, said the higher rates at which landlords would be forced to remortgage would pitch some of them into losses.

Calculations by Hamptons found that a higher-rate taxpaying landlord on an average yield of 6.1 per cent who remortgaged last month would see their annual net profit fall by 72 per cent to £884 from £3,198. Assuming the Bank of England’s half-point base rate rise last week was passed on to mortgage costs (before taking into account the impact of the “mini” Budget) this would reduce average profits to £212 a year.

If base rates rise to 2.5 per cent from 2.25 per cent, only those with properties yielding more than 7 per cent would continue to make a profit, the agent said.

“This is one of the main reasons why London-based investors are increasingly purchasing buy-to-lets beyond the capital, targeting higher yielding areas. So far this year, a record two-thirds (66 per cent) of London-based investors chose to purchase a buy-to-let property outside the capital, up from just 26 per cent a decade ago,” Hamptons said.

Aside from selling up or buying elsewhere, other options for landlords seeking bigger yields include investing in houses of multiple occupation (HMOs) for higher rental income; moving to limited company ownership so as to take advantage of tax relief on mortgage interest payments; or curbing their ambitions for new purchases by buying a smaller home.

Landlords might also try to pass on some or all of their higher mortgage costs to their tenants. However, sharp rises in rents this year, combined with the financial strains of soaring inflation, will limit their ability to do so.

Ben Beadle, chief executive of the NRLA, which represents landlords, said its research showed that landlords would much rather have a reliable long-term tenant than risk being left with an empty home because of insupportable rent increases.

“But it tends to depend on individual circumstances and the property owner’s ability to either absorb [higher interest payments] or the tenant’s or property’s ability to warrant higher rents,” he said.

A surge in the number of landlords requiring refinancing is expected over the next 12 months. A stamp duty surcharge for buy-to-let purchases in 2016 and new rules on borrowing constraints in 2017 led to a spike in purchases by landlords before these rules came into effect. Many of those who signed up for five-year fixed-rate deals around that time are now seeing their fixes run out.

Of 1.3mn buy-to-let mortgages on fixed rates in June 2022 (out of a total just over 2mn), about 220,000 were set to mature over the 12 months to June 2023, according to industry body UK Finance. A further 250,000 will come due over the 12 months to June 2024.

The typical borrower in the private rented sector uses interest-only loans, which amplify the effects of interest rate changes on their monthly payments compared with those paying down capital and interest together. However, lenders restrict landlords from borrowing more than 75 per cent of a property’s value, making them less vulnerable to falls in house prices than, for instance, a first-time buyer on a 90 per cent LTV mortgage.