Landlords have been warned to prepare for high mortgage rates that will force many to sell – or create financial misery for tenants as rents increase.
The increases could put pressure on the hundreds of thousands of landlords who have invested in buying-to-let properties for income in old age.
Last week, more than 1,000 mortgage deals were pulled from the market, according to the Money Rate Reviewer. Of the 850 or so buy-to-let deals still available, owners now have to pay an average mortgage rate of 5.26 percent for a five-year fixed-rate deal. A month ago, this deal averaged 3.25 percent.
Mortgage chaos: More than 1,000 mortgages were withdrawn this week amid fears of rising interest rates
On a £300,000 mortgage this could be up to an additional £500 in monthly payments. Mortgage rates rose after the Bank of England raised the base rate to curb inflation.
Last December, the core rate was just 0.1 percent, but now it’s 2.25 percent. Financial markets expect it to rise to six percent by spring.
The National Association of Residential Landlords believes this is not the time to panic. Keep calm, says Chris Norris, its Director of Policy and Campaigns. No one is sure what will happen but take this opportunity to consider your future plans.
“Those who have three months or less left on a fixed-rate deal may start looking around now as lenders can sign up new landlords for a future deal starting in a few months.”
Mortgage purchase rates tend to be higher because they are considered to have higher risk.
About 90 percent of buy-to-let loans are interest-only, where you pay off the interest charges on your loan and not any of the principal borrowed.
Moneyfacts notes that although the average mortgage deal stands at more than 5 percent, there are still some competitive deals out there — though more are being pulled each day.
Among the current Best Buys is a two-year 4.39 percent fixed-rate purchase offer to rent with NatWest for a loan of up to 60 percent with no arrangement fee.
For a fixed five year deal, NatWest is offering a rate of 3.89 per cent back for a 60 per cent max mortgage and £995 mortgage.
Meanwhile, TSB is offering a two-year buy-to-let mortgage tracker that charges 1.89 percentage points over the base rate for a 60 per cent loan to value, with an arrangement fee of £995 too.
Lee Grandin, owner of buy-for-lease brokerage Landlord Mortgages, agrees that now is not the time to panic.
“Remember, there is still a shortage of property available for people to rent in big cities, like London,” he says. So if mortgage rates are going up, maybe you should consider increasing your rent instead of selling.
However, not all landlords will be able to pass on price increases because renters are also dealing with rising costs and may not be able to pay more.
“Landlords should remember that they’ve been screwed with low interest rates for years,” Grandin adds.
Another major concern for buy-to-let owners is the risk of a housing collapse – fueled in part by landlords and homeowners who are forced to sell because they can no longer afford their mortgage and other bills.
Should I sell or gamble I can weather the storm
Hannah Pike fears she may have to sell two buy-to-let properties next year if interest rates continue to rise.
The 42-year-old mother-of-two is set to re-mortgage a £462,000 three-bedroom semi-detached property in Wokingham, Berkshire, and a £380,000 two-bedroom house in the Oxfordshire town of Thame in the next couple of years.
The dilemma: Hannah Pike has sleepless nights because of interest rates
Hannah, a part-time personal assistant from Wokingham, says: “Something has to give, and the turmoil of the mortgage market is giving me sleepless nights. I have to cut and run – or bet I can weather the storm. But the latter means a rise in rent.” for tenants.
She adds: ‘I want to keep the property until one day it is passed on to my children. But if you did, it would mean the rent on the Wokingham estate increased from £1,500 to £2,000 a month – and for Thame from £1,100 to £1,350.
“It’s not about making money off my tenants, but about keeping my head above water and not getting into debt.”
House prices in the 12 months to July rose by 15.5 per cent and averaged £292,000, says the Office for National Statistics.
Many fear that this level of growth is unsustainable and could end in a crash – commentators have predicted house prices to fall between 10 and 20 percent over the next two years.
Because buy-to-let borrowers tend to choose interest-only mortgages, they rely on raising capital as part of their investment plan. If the value decreases, it can be left in the pocket.
Owners are already feeling the crunch with a slew of drastic new measures being introduced to improve safety and environmental standards.
This started last year with new electrical safety rules, where every five years an Electrical Installation Condition Report (EICR) must be completed – checking wires and sockets.
These certificates can cost £1,000 because electricians have to go through the whole house to give it a clean bill of health. If rewiring is required, repairs can cost thousands of pounds.
New Energy Performance Certification (EPC) legislation is also being introduced which means that from 2025 a minimum EPC of ‘C’ is required for rental properties. Today, only four homes out of ten reach this required standard.
This is because older properties – many of which are rented – tend to not have well insulated walls or ceilings and have sash windows. The cost of rectifying many Victorian properties can run into the tens of thousands of pounds.
There’s also concern that an expected tenant reform bill, which will be introduced early next year, might repeal the Section 21 provision on no-fault evictions.
This means that even if the landlord has a valid reason for asking the tenant to move out – such as not paying rent – they could face the potentially costly process of having to take the case back to the law courts.
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