Care homes close as mortgage rate rises make businesses ‘unviable’

Care homes operators have warned that a recent surge in mortgage rates and a delay to government reforms will sound a “death knell” for some UK providers.

The number of registered care homes fell to 12,224 on May 31 from 12,280 at the start of the year, according to data shared with the Financial Times by carehome.co.uk, a care home review site.

The rate of closures in England slowed in the first half of 2023, compared with the same period in 2022. However, a rise in mortgage rates threatens to increase the burdens on the care sector, compounding rising food and fuel prices and funding shortfalls.

“We are facing some extremely challenging times,” said Nadra Ahmed, chair of the National Care Association, a professional body. “There are vulnerable providers out there right now and there are a lot [of homes] that will be on the market.”

The challenges encountered by some operators would make their businesses “unviable”, she added, citing Pelham House in Kent as one of the latest to hit financial trouble. “Sadly they had to make the decision after 40 years to shut their doors,” she said.

“If you’ve got mortgages that’s going to have an impact on your ability to repay your borrowings.”

The Bank of England increased interest rates by 0.5 percentage points to 5 per cent in June in an effort to tame inflation, leading to rises in monthly mortgage repayments for borrowers on variable rates.

While interest rates are not expected to climb by as much as previously estimated following better than expected June inflation data last week, care providers are already feeling the heat.

Jay Dodhia, chief executive and co-founder of Serene Care, established with his wife Palvi, renovates and runs failing care homes. He said its model had been resilient but cautioned that rising interest rates could be particularly challenging for new builds.

“Most care homes are [on] variable rates — even when rates were very low it was very hard to get fixed rates on care home mortgages,” he said. “As the variable rate or the underlying BoE rate crept up, so have our interest payments.”

“Everything in isolation will affect you, if you put it all together — the rising inflation, utilities, food costs, staffing challenges . . . it could be a death knell for several [providers],” said Dodhia.

The number of councils in England reporting care home closures in their area rose to about 44 per cent at the end of May 2023, according to the Association of Directors of Adult Social Services, a charity.

Natasha Curry, deputy director of policy at the Nuffield Trust, said in 2019, before the coronavirus pandemic, the level was about a third.

“With borrowing rates also rocketing, it’s not a surprise that we’re seeing more closures of care homes and I think it’s inevitable that trend will continue,” said Curry.

During the Covid crisis, an injection of emergency government funding had helped to stabilise the market, cushioning the impact of falling occupancy rates. But that funding had ended.

Cathie Williams, joint chief executive of the Association of Directors of Adult Social Services, said councils had a duty to provide “continuity of care” for residents if a home closed.

But a decade of austerity, Brexit, the pandemic and staff shortages compounded by surging living costs had contributed to “a considerable lack of resilience” in the sector.

Where care places existed, “it tends to be because they’re in the wrong place or the wrong kind of care home or the quality is not good enough”, she added.

Health leaders warned of the effect of diminishing capacity in social care on the wider health system. Matthew Taylor, chief executive of the NHS Confederation which represents health organisations across the UK, said health leaders knew “all too well the impact that a lack of social and residential care has on the NHS”.

The support provided to residents in care homes could prevent avoidable hospital admissions. Moreover, a lack of available care home places for patients who could otherwise have been discharged from hospital could create “a log jam effect in A&Es with long ambulance waits”, Taylor added.

“The good news is we can see the rate of closures slowing in England and Wales although unfortunately Scotland has seen a rise,” said Richard Stebles, head of business intelligence at carehome.co.uk.

“In order to stay sustainable, we are likely to see care providers trying to attract more privately funded residents who pay higher fees than those funded by the local authority.”

Dodhia said the average fee for publicly funded social care bed should be £900 per week. But local authorities are often paying about £600 to £700 a week; some are willing to spend just £490 a week.

Care home operators had hoped for more funding from local authorities following a “cost of care exercise” that sought to generate a shared understanding of the cost of adult social care. But some councils struggled to increase payment and reforms were pushed back to October 2025.

Providers have also fought to access the £200mn earmarked for the NHS crisis plan, which aimed to move patients from hospitals to care homes.

A “winter discharge fund” had been announced, said Dodhia, but “local authorities didn’t really want to spend it”. He added: “They knew that as soon as that funding ran out then the residents would be left vulnerable, because they can’t continue to fund [the scheme].

“We heard about all these great support plans but we didn’t see any of it,” he said.

The Department of Health and Social Care said it was investing up to £7.5bn in social care over the next two years — “the biggest funding increase in history” — to boost capacity in social care, including £1.4bn that local authorities could use flexibly, including to pay social care providers more.

It added: “Despite the pressures the adult social care market faces, the number of adult social care locations registered with the Care Quality Commission has remained stable, and there are 6,600 more home care agencies in England now compared to 2010.”