One of the primary drivers behind the impact of mortgage rate increases on renters is the surge in rental demand, according to Oliver Knight, head of residential development research at real estate firm Knight Frank.
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LONDON — Mortgage rates in Britain are skyrocketing, leading many to question their ability to afford their current mortgages. Prospective first-time home buyers are also considering delaying their purchases in hopes of securing a better deal in the future.
“Anyone with a mortgage who needs to refinance is facing a significant increase in their monthly repayments,” said Ed Monk, an associate director for personal investing at Fidelity International, in an interview with CNBC Make It.
And it’s not just homeowners and potential buyers feeling the impact. Renters are also experiencing the effects in an already challenging rental market, as Richard Donnell, executive director of research at Zoopla, explained:
“Rents have been rising across the country and have been outpacing earnings growth for several months now,” he told CNBC Make It. “Demand is being fueled by a strong job market, record immigration, and rising mortgage rates.”
The Mortgage Crisis
The mortgage crisis in Britain has been brewing for months. Last September, hundreds of mortgage deals were halted or modified due to market turmoil in the U.K. economy. This raised concerns about higher base rates and their impact on mortgage affordability going forward.
Many mortgage products are directly tied to the U.K. central bank’s base rate. This means that if the Bank of England raises interest rates, mortgage costs increase for many borrowers.
Last month, some mortgage products were pulled again amid concerns about the potential height of interest rates. British mortgage rates reached a 15-year high earlier this month, and institutions like the Bank of England warned of challenging times ahead for the housing market.
Significant increases in costs would be harmful to many homeowners, putting pressure on household finances and potentially leading to insolvency for millions of households.
Potential Solutions
While an immediate solution may be unlikely, there are options for homeowners who need to refinance their homes, according to experts.
“A mortgage adviser with access to a wide range of mortgage products should be able to help you find the best deal,” suggested Ed Monk.
The type of mortgage chosen is also crucial. Both fixed-rate and tracker mortgages, where the rate changes in line with central bank interest rate decisions, are worth considering.
Nicholas Mendes, a technical mortgage manager at mortgage broker and advisor John Charcol, explained that there are pros and cons to both options.
“The key benefit of a tracker mortgage is its flexibility and the ability to switch to a new product without early repayment charges,” he said. However, it also means there is uncertainty about monthly mortgage payments and the risk of them increasing.
Other options for mortgage holders include extending the term of their mortgage to lower monthly payments or switching to an interest-only mortgage, according to Mendes.
“Those fortunate enough to have significant savings or investments could consider using them to pay down some debt,” added Ed Monk.
However, experts warn that some of these solutions, such as using savings or extending the mortgage term, could lead to further challenges in the future, despite providing short-term relief.
If your mortgage is due to expire soon, there are several steps you can take, ideally several months before it runs out, explained Mendes. This includes staying with your current lender at a different rate, switching lenders, or transferring your mortgage product.
Renters Impacted
One of the key reasons renters are caught up in the surge of mortgage rates is that it also leads to an increase in rental demand, according to Oliver Knight, head of residential development research at real estate firm Knight Frank.
“The sharp increase in mortgage rates, and its impact on affordability, makes buying a home impossible for many in the short-term,” he explained. “This fuels further demand in the rental market, which already faces supply constraints.”
Economists Urvish Patel and Barry Naisbitt at the National Institute of Economic and Social Research have also observed this trend.
Prospective buyers may feel “trapped” in the rental market, discouraging them from trying to purchase a home. This, in turn, increases demand for rental properties and drives up rents, they added.
Rising costs for landlords may also play a role, according to Richard Donnell. Higher mortgage rates are causing some landlords to pass on the additional costs to renters.
NIESR’s economists echoed these comments and mentioned that recent regulatory changes have worsened the problem.
“Recent changes to buy-to-let investment rules and higher mortgage costs for buy-to-let landlords will likely make buy-to-let investments less attractive or even unviable, leading such landlords to sell their properties. This action would result in a squeeze in rental property supply,” they said.
‘No Signs of Improvement’
Options for renters remain limited.
“The supply-demand imbalance in the rental market shows no signs of improvement,” said Oliver Knight.
The main long-term solution identified by experts is to increase the supply of rental properties and build new homes. Progress is being made, but expansion is not occurring quickly enough to reverse the current imbalance, Knight explained.
Patel and Naisbitt added that there are some short-term options, such as payment plans for tenants to ensure they can afford rent or caps on rent increases. However, these options come with risks.
“Such policies may put pressure on landlords and encourage them to sell properties, which could exacerbate the tightness in rental supply,” they said.
This leaves a bleak outlook for renters, mortgage holders, and potential buyers alike, with little hope of immediate relief.
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