Landlords have been hit hard by higher mortgage rates, resulting in a sharp decline in profits, according to new research conducted by estate agent group Hamptons. The study reveals that landlords are now paying a staggering 40% more in mortgage interest compared to a year ago. In August, mortgaged buy-to-let investors had to allocate an average of 37% of their rental income towards mortgage costs. This is a significant increase from the 28% reported last year and the 24% recorded in November 2021, before interest rates began to rise.
The rise in mortgage costs is particularly concerning given that the number of outstanding buy-to-let mortgages has been steadily decreasing since November 2022, as investors either paid off their debts or sold their properties. Moreover, this trend is occurring alongside skyrocketing rent prices. According to Hamptons, annual rental growth in the UK remained in double digits throughout September, with the average cost of a new rental up by 11.7% compared to the same period last year.
Currently, the average two-year fixed rate for buy-to-let mortgages stands at 6.24%, as reported by Moneyfacts. For a landlord seeking a £200,000 interest-only mortgage, this equates to monthly mortgage costs of £1,040 if they buy or remortgage using a two-year fix. When you factor in additional expenses such as void periods, repairs, maintenance, letting agent fees, compliance checks, insurance, and service charges, it becomes clear that many landlords heavily rely on rent increases to maintain profitability.
Hamptons estimates that, on average, nearly two-thirds of rental income received by mortgaged landlords will be spent on mortgage interest when the interest rate is around 6%. This indicates the severe erosion of profit margins for landlords.
Fortunately, many landlords are currently shielded from the impact of higher rates in the short term due to existing fixed-rate deals. According to UK Finance, there are a total of 2,030,000 outstanding buy-to-let mortgages, with the majority of them being on fixed rates. As these fixed-rate mortgage agreements expire, the availability of affordable mortgage rates is expected to decrease unless rates significantly decrease.
Aneisha Beveridge, Head of Research at Hamptons, warns that even if the Bank of England does not raise rates further, landlords could end up paying over £20 billion in mortgage interest over the next two years. This would account for more than half of the rental income received by mortgaged landlords. Beveridge cautions that some landlords may find this unaffordable and choose to exit the market, thereby putting upward pressure on rents.
Despite the challenging landscape, there is some relief for landlords in the form of falling mortgage rates in recent weeks. While average rates for both two-year and five-year fixed deals remain above 6%, some landlords can now secure rates below 5%. For example, The State Bank of India’s UK arm (SBI UK) offers a 3.9% two-year fixed rate to applicants with at least a 50% deposit or equity. However, this deal comes with a significant 5% arrangement fee.
Hamptons’ analysis indicates that even with a 5% interest rate, the typical mortgaged landlord would spend 54% of their rent on mortgage interest. Most of the deals offered at around the 5% mark also come with substantial arrangement fees, which landlords need to consider.
Nicholas Mendes, Mortgage Technical Manager at John Charcol, a mortgage broker, explains that despite the recent improvement in rates, many landlords are facing difficult decisions. He notes that more landlords are opting for shorter-term fixed rates or variable terms to gain flexibility and the freedom to sell a property if necessary. Mendes adds that landlords are having tough conversations with tenants, with many choosing not to increase rents annually to alleviate financial pressure on households. However, upon renewal, landlords often face the reality that they need better terms from another lender and must adjust accordingly.
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