Mortgages: Squeeze On Landlords Will Hit Renters Too

According to estate agency Savills, landlords in the UK are experiencing their lowest profits in 16 years due to the rising interest rates, prompting some to consider exiting the buy-to-let sector. The Bank of England’s base rate has seen twelve consecutive increases, coupled with escalating mortgage costs, leading to a squeeze on landlords’ income.

This situation is particularly challenging for smaller buy-to-let investors who are nearing retirement age. If they decide to sell their properties, it could lead to a decrease in the number of homes available for rent, thereby driving up rental prices.

Lucian Cook, the head of residential research at Savills, describes 2023 as a turning point for the private rented sector in Britain. He highlights a significant risk of landlords leaving the market, especially those with substantial borrowing, which would exacerbate the already imbalanced supply-demand ratio in many areas.

Interest rates have been steadily rising since December 2021, and recent expectations suggest further increases on the horizon. Market indicators, including wage data and rising prices, anticipate a longer period of elevated inflation and interest rates than previously anticipated. Consequently, government borrowing costs, which directly influence mortgage rates, have reached their highest level since the previous year’s mini-budget.

Source: BBC

The continued rise in mortgage rates leaves landlords in a particularly vulnerable position. Savills’ data from the first quarter of this year reveals that net profits for buy-to-let investors have fallen below 4%, the lowest level seen since 2007. In stark contrast, during the previous decade’s era of ultra-low interest rates, profits soared to as high as 23%.

While larger landlords may be more likely to withstand these challenges, Savills’ research indicates that there are approximately 1.9 million properties owned by 620,000 landlords aged over 65, with an additional 1.9 million owned by landlords between the ages of 55 and 64. If these landlords opt to leave the sector, tenants will face reduced options for rental properties. Mr. Cook suggests that better-paid renters in secure employment would have an advantage in securing the remaining properties.

Recent figures published by the Bank of England indicate that the proportion of mortgages granted to buy-to-let investors is at its lowest level since 2011. The data also reveals a sharp decline in total mortgage lending during the first quarter of the year, with a 23.6% year-on-year decrease, alongside an increase in mortgage repayment delinquencies.

Furthermore, mortgage rates have risen for borrowers seeking new deals, with the typical two-year fixed-rate deal now averaging 5.9%, according to financial information service Moneyfacts. The average rate for a five-year fixed-rate mortgage stands at 5.55%.

In conclusion, rising interest rates have resulted in landlords facing their lowest profits in 16 years. This trend may lead to a reduction in available rental properties and an increase in rental prices. Smaller investors nearing retirement age are particularly impacted. It remains to be seen how the market will adjust to these challenges, and the consequences for both landlords and tenants in the coming months.