Forecast rises in interest rates could force landlords to raise rents to meet mortgage affordability criteria, or risk being trapped on higher rates, according to a buy-to-let expert.
This is because interest costs across the life of a buy-to-let mortgage would more than quadruple, going from £115 a month in interest now, compared to £479 with the rise in one example.
The Office for Budget Responsibility has forecast a worst-case scenario whereby a ‘wage spiral’ or energy price shock would require the Bank of England to increase base rate to 3.5 per cent in 2023 to curb inflation.
Price hike: A rise in the base rate would incur greater mortgage costs for landlords, and they could pass this increase on to their tenants in the form of higher monthly rents
The base rate is currently at a record-low level of 0.1 per cent, and has been since the beginning of the pandemic.
The OBR’s more conservative forecast would see the base rate increased to 0.75 per cent.
While not officially tied to the base rate, an increase would likely prompt mortgage lenders to up their rates to a similar degree.
If the more drastic prediction was realised, homeowners would see their payments increase by hundreds every month – and landlords even more, as the rates they pay are already typically higher.
The table below shows how much the monthly cost of a buy-to-let mortgage would increase, if mortgage rates increased by the same amount as the base rate.
|Mortgage amount||Current best rate||Monthly payment||Rate +0.65%||+0.65% monthly payment||Rate +3.4%||+3.4% monthly payment|
|£100,000, 25% deposit, 2 year fix, 25 year term||1.14%, £1705 fee||£383||1.77%||£414||4.54%||£558|
|£100,000, 25% deposit, 5 year fix, 25 year term||1.64%, £1,705 fee||£406||2.29%||£438||5.04%||£587|
|£200,000, 25% deposit, 2 year fix, 25 year term||1.34%, £1,999 fee||£785||1.99%||£847||4.74%||£1,139|
|£200,000, 25% deposit, 5 year fix, 25 year term||1.69%, £2,275 fee||£818||2.34||£881||5.09%||£1,180|
A mortgage expert has warned that rate changes like these would have a huge impact on landlords, who already pay interest rates higher than that of the average homeowner.
While he said that he was ‘not convinced’ that rates would be at 3.5 per cent by 2023, chief executive of buy-to-let specialist mortgage broker Property Master, Angus Stewart, said that this would have a ‘profound’ impact on landlords, and therefore renters.
It could cause their monthly mortgage interest payments to increase by up to four times when they came to remortgage, he said, meaning that they would have to increase rents significantly in order to cover the difference.
In the £100,000, five-year example above, for instance, the landlord would currently pay £79 a month in interest.
But if the base rate increased by 3.4 per cent, and their mortgage rate by the same amount, this would rocket to £259 – more than three times as much.
On the £200,000, two-year example, they would increase from £115 a month in interest now, compared to £479 with the rise – an almost four-fold rise.
This is assuming that they would not be able to access a better interest rate if they subsequently went down.
‘Rates at or near the level the OBR are suggesting may have a profound effect on the private rented sector,’ Stewart said.
This, he added, was because of the strict requirements that banks have about the amount of rent landlords must bring in to cover their mortgage payments.
‘Buy-to-let lenders have strict affordability requirements and typically expect rents to cover between 125 per cent to 145 per cent of the monthly mortgage payment,’ he explained.
‘Higher rates mean higher monthly payments which would then have to be matched by higher rents.’
Sustained increases in rates could prompt some landlords to leave the buy-to-let market
If landlords needed raise rents when they remortgage, this could mean that those who had to remortgage may be forced to charge much higher rents than their competitors locked into better fixed-term deals.
With cheaper properties on the market, landlords may struggle to get tenants to pay the higher rents – potentially meaning they would not be able to qualify for a remortgage and therefore go on to their lender’s higher, standard variable interest rate.
‘If landlords are not able to raise rents to meet the affordability requirements, they will in affect become mortgage prisoners, forced to stay with their existing lender on a costly SVR after a fixed rate had ended,’ Stewart said.
This would slash their returns, and may also prompt them to leave the market altogether, reducing the supply of homes for renters.
Rates are already starting to increase for landlords as the markets price in a potential base rate rise, as they are in the homeowner market.
‘Rising rates do look to be an inevitability and the market is beginning to price them in,’ Stewart added.
‘If you are coming to the end of a fixed rate shortly you should look to put another one in place now and a five-year fixed rate looks like the best way to provide certainty over a good amount of time.
‘There are some competitive deals still around but that may change very quickly.’