Introduction:
Buy-to-let investors in the UK are feeling the pinch as mortgage interest rates soar, causing a significant dent in their profits. Recent analysis reveals that landlords are now paying a staggering 40% more in mortgage interest than they were just a year ago. This substantial increase in costs is even more surprising, considering that many landlords are still protected by fixed-rate agreements signed before interest rates began to rise.
Surging Mortgage Costs:
As of August, mortgaged buy-to-let investors were shelling out an average of 37% of their rental income on mortgage expenses. This is a significant jump from 28% a year ago and 24% in November 2021. These numbers underscore the escalating burden of mortgage costs on landlords, even as the number of outstanding buy-to-let mortgages has been declining since November 2022, with investors either reducing their debt or selling their properties.
Rising Rents and Costs:
This rising wave of mortgage costs comes at a time when rents in the UK are on the upswing. According to reports, annual rental growth remained in the double digits in September, with the average cost of a new rental property increasing by 11.7% compared to the previous year. This means that, on top of higher mortgage bills, landlords are also grappling with other expenses, including void periods, repairs, maintenance, letting agent fees, compliance checks, insurance, and service charges.
Impact on Landlords' Profit Margins:
The average two-year fixed-rate for buy-to-let mortgages stands at 6.24%, and landlords with a £200,000 interest-only mortgage would be paying around £1,040 per month in mortgage expenses under the current rates. This highlights the increasing reliance of many landlords on rising rents to maintain profitability.
At an average outstanding rate of 6%, estimates suggest that nearly two-thirds of rental income earned by mortgaged landlords is funneled into mortgage interest payments. This erosion of profit margins is becoming a pressing concern for landlords as they are squeezed between rising costs and the imperative to maintain competitive rents.
Temporary Relief and Future Concerns:
Fortunately, many landlords are still protected from higher rates in the short term by their existing fixed-rate deals. However, as these deals expire, the number of affordable mortgage rates is expected to dwindle unless interest rates see a substantial drop. Currently, landlords are collectively paying approximately £15 billion in mortgage interest, a figure expected to rise as cheaper fixed-rate deals come to an end.
Even if the Bank of England refrains from further rate hikes, predictions suggest that mortgage interest payments by landlords could exceed £20 billion over the next two years, absorbing over half of the rent they receive. For some investors, this could become unaffordable, putting upward pressure on rents and potentially leading some landlords to exit the market.
Changing Mortgage Rates:
In recent weeks, mortgage rates have started to fall, offering some respite for landlords. While average rates for two-year and five-year fixed deals still remain above 6%, some landlords can now secure rates below 5%, although many of these deals come with substantial arrangement fees. The State Bank of India's UK arm, for example, is offering a 3.9% two-year fixed rate for those with at least a 50% deposit or equity.
Conclusion: The rising mortgage costs for buy-to-let landlords in the UK are threatening their profitability. With the burden of mortgage expenses increasing, landlords are caught in a precarious position, as rising rents may not be sufficient to offset these escalating costs. As fixed-rate deals eventually expire, the future remains uncertain, and landlords could face additional challenges that might reshape the landscape of the rental market in the UK.
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