Landlords are being warned to brace themselves for a hike in mortgage rates that will force many to sell up – or create financial misery for their tenants with rent rises.
The rises could squeeze hundreds of thousands of landlords who invested in buy-to-let property for an income in older age.
Last week, more than 1,000 mortgage deals were pulled from the market, according to rates scrutineer Moneyfacts. Of the 850 or so buy-to-let deals still available, landlords must now pay an average mortgage rate of 5.26 per cent for a five-year fixed rate deal. A month ago, such a deal averaged 3.25 per cent.
I must sell or gamble I can weather the storm
Hannah Pike fears she may have to sell her two buy-to-let properties next year if interest rates continue to soar.
The 42-year-old mother-of-two is due to remortgage a £462,000 three-bedroom semi-detached property in Wokingham, Berkshire, and a £380,000 two-bedroom terraced home in the Oxfordshire town of Thame in the next couple of years.
Dilemma: Hannah Pike is having sleepless nights over interest rates
Hannah, a part-time personal assistant from Wokingham, says: ‘Something has to give and the mortgage market turmoil is causing me sleepless nights. I must either cut and run – or gamble that I can weather the storm. But the latter means a hike in rent for tenants.’
She adds: ‘I want to keep the properties so that one day they might be passed on to my children. But if I do this, it will mean raising the rent on the Wokingham property from £1,500 to perhaps £2,000 a month – and for the one in Thame from £1,100 to £1,350.
‘It is not about making money out of my tenants, but keeping my head above water and not falling into debt.’
On a £300,000 mortgage, this might amount to an extra £500 in monthly payments. Mortgage rates have been ramped up after the Bank of England hiked the base rate to keep a lid on inflation.
Last December, the base rate was just 0.1 per cent, but it has now hit 2.25 per cent. Financial markets are predicting it could rise to six per cent by Spring.
The National Residential Landlords Association believes this is not the time to panic. Its director of policy and campaigns, Chris Norris, says: ‘Keep calm. No one is sure what is going to happen but take this opportunity to consider your future plans.
‘Those with three months or less left on a fixed-rate deal might start looking around right now as lenders can sign up new landlords to a future deal that begins in a few months’ time.’
The rates for buy-to-let mortgages tend to be higher because they are seen higher-risk.
About 90 per cent of buy-to-let loans are interest-only, where you pay back the interest charges on your loan and not any of the original capital borrowed.
Moneyfacts points out that although average mortgage deals stand at more than 5 per cent, there are still some competitive deals – although more are getting withdrawn each day.
Among the current best buys are a 4.39 per cent two-year fixed-rate buy-to-let offer with NatWest for a loan-to-value of up to 60 per cent with no arrangement fee.
For a five-year fixed deal, NatWest offers a rate of 3.89 per cent again for a maximum 60 per cent loan-to-value mortgage and a £995 arrangement feel.
Meanwhile, TSB is offering a two-year tracker buy-to-let mortgage that charges 1.89 percentage points above the base rate for a 60 per cent loan-to-value, also with a £995 arrangement fee.
Lee Grandin, owner of buy-tolet broker Landlord Mortgages, agrees that now is not a moment to panic.
He says: ‘Remember, there is still a shortage of properties available for people to rent in major cities, such as London. So if mortgage rates rise you should perhaps consider raising the rent rather than simply selling up.’
However, not all landlords will be able to pass on rate rises as tenants are also dealing with rising costs and may not be able to pay more. ‘Landlords must remember they’ve been spoiled with low rates for years,’ adds Grandin.
Another major concern for buy-to-let owners is the risk of a housing crash – partly fuelled by landlords and homeowners being forced to sell up because they can no longer afford their mortgage and other bills.
House prices for the 12 months to July were up 15.5 per cent and averaged £292,000, says the Office for National Statistics.
Many fear this level of growth is unsustainable and could end in a crash – commentators have forecast house price falls between ten and 20 per cent over the next couple of years.
Because buy-to-let borrowers tend to opt for interest-only mortgages, they rely on capital appreciation as part of their investment plan. If the value falls, they could be left out of pocket.
Landlords are already feeling the crunch with a slew of tough new measures being brought in to improve safety and environmental standards.
This began last year with new electrical safety rules, where every five years an electrical installation condition report (EICR) must be completed – checking wiring and sockets.
Such certificates can cost £1,000 because electricians have to go through the entire house to give it a clean bill of health. If rewiring is required, repairs might cost thousands of pounds.
New energy performance certificate (EPC) legislation is also being introduced that means from 2025 rental properties must have a minimum EPC of ‘C’. Today, only four out of ten homes reaches this required level.
This is because older properties – many of which are rented out – tend not to have well-insulated walls or roofs and have drafty windows. The cost to rectify many Victorian properties may be tens of thousands of pounds.
There is also concern that an expected Renter’s Reform Bill, to be rolled out as early as next year, might scrap a ‘section 21’ clause on no-fault evictions.
This means even if a landlord has a good reason to ask a tenant to leave – such as a failure to pay rent – they may face the potentially costly process of having to drag the case through law courts.
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