Buy-to-let landlords with mortgages facing a crisis

The Bank of England’s Monetary Policy Committee, with responsibility for making decisions about the bank rate, at its last meeting, raised interest rates by a further 0.5 per cent, to 2.25 per cent. That’s the highest level in 14 years.

This is the seventh consecutive bank rate rise in recent months as the Bank takes steps to curb what is now soaring inflation. The latest inflation figure of 9.9 per cent is a 40-year high but to get it under control and back to the Bank’s target figure of 2 per cent, interest rates are likely to go still higher. Two further large rises have been predicted by experts, expected when the MPC meets again on Thursday 3 November and Thursday 15 December.

Putting landlords under stress

All of this will put many buy-to-let landlords under severe strain over the coming months as these sharp increases in interest rates put up their mortgage interest charges, when it comes to refinancing. Profits will be hit, and if house values slump, some will find themselves in negative equity.

Some mortgage lenders previously offering buy-to-let mortgages to landlord investors have withdrawn their fixed-rate loans following the Chancellor’s mini Budget last week.

Sell up or increase rents?

Soaring mortgage rates will force some buy to let landlords to put their properties on the market for sale, while others will look to increase rents in an attempt to balance their books, otherwise they would be subsidising a mortgage payment deficit, that’s if they can afford to do that.

According to the Financial Times (FT) around 40 lenders have now withdrawn all their fixed-rate buy-to-let products following the Chancellor’s announcements. This reflects the rises in wholesale borrowing costs for lenders after the adverse market reaction the Chancellor’s plans, and their expectations that the Bank of England will raise interest rates further.

This will drastically reduce the choice that landlords have when remortgaging because as these mortgage products return to the market they will come back with considerably higher interest rates.

Jeni Browne, sales director at broker Mortgages for Business told the FT that, “…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.”

Landlords have enjoyed rising rents and house prices

The UK’s small-scale landlords have, for many years, benefited greatly from steadily rising house prices and a shortage of rental accommodation, a dearth of supply in many locations which has kept rents rising as well.

Now, with a dramatic turn-around in many landlords’ fortunes as a result of rising inflation and interest rates, as we come out of Covid, and face an unprecedented energy crisis, some are facing a financial cliff edge.

While there are still mortgage deals in the market available at just under 5 per cent, this is a good 70 per cent higher than those available last year.

Aneisha Beveridge, the head of research at the estate agent Hamptons, told The Guardian newspaper, “I think there are more and more risks mounting for landlords. The landlords who will be most at risk are those that have bought in the last couple of years and taken out the maximum loan they could get against that property.”

London landlords could be hit hardest

These trends are going to hit those landlords hardest who bought in areas where property prices were highest and yields low, London and the south east being cases in point: London, is “likely to see their profits hit hardest”, adds Aneisha Beveridge.

Many small scale landlords have invested in buy-to-lets because they could not find a safe haven for their money, nothing they could find was approaching returns like a rental property. Banks and building society interest rates were almost non-existent. In an inflationary environment, with property asset prices seemingly well protected, property has always seemed like a safe place to get a good return.

Buy-to-lets represent many landlords’ main pension

More and more ordinary citizens have committed their life savings to the UK private rental sector, which as a stated overall value of around £1.4trillion. Many see their single let or small portfolio as their main pension pot.

The Bank of England has indicated that interest rates may have to rise as high as 6 per cent, while at the same time some experts are forecasting drops in property values as much as 20 per cent. It leaves some buy-to-let investors with a stark choice: sell up or raise rents to meet their obligations, at a time when they may be in negative equity.

The criteria that lenders use to judge buy-to-let affordability include a calculation of loan to values and rental income to repayment cost. Previously, rent levels and property values gave both lenders and borrowers the safety margin they needed. But given the recent changes some mortgage lenders have begun tightening-up on these criteria when it comes to remortgaging.

Remortgagers will still be able to get a new loan with their existing lender using a “product transfer”, but if they fail the tests their options will be severely limited when looking to move to a different lender.

The search for higher yields

There’s been a trend for some time now for London-based landlord investors to buy outside of the capital in locations where yields are much higher. According to Hamptons International, this year has seen a large increase in the number of London based buy-to-let investors buying buy-to-let property outside the capital.

Other investors have been seeking those higher yields by buying into the commercial end of residential investments – houses in multiple occupation (HMOs). These produce much higher yields than traditional vanilla buy-to-lets and if purchased through a limited company there can be considerable tax advantages.

Most buy to let mortgages are on fixed rates and only a small proportion of the total 2 million or so outstanding will come up for renewal over the next 12 months. What’s more, lenders have for some time now restricted landlords from borrowing more than 75 per cent of their property’s value, making them less vulnerable to falls in house prices than a first-time buyer on a 90 per cent LTV mortgage.

Another development is that the financial industry regulator, The Financial Conduct Authority, is instructing those mortgage lenders who have pulled their products to come back to the market as soon as possible.