Why High Mortgage Interest Rates May Be a Positive for Landlords

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Its no secret that the multiple consecutive
increases to the Bank of England (BoE) base rate,
currently at 5, have had a significant and
sometimes dramatic impact on borrowing costs, not
least for homeowners with variable-rate tariffs.
The same applies to landlords, with current rates
on buy-to-let mortgages hovering at around 6 for
five-year fixed terms and as high as 7 or above
for two-year fixed mortgage agreements. However,
while many will welcome the predictions that
interest rates will begin to fall as we progress
through the year, there are also indications that
professional landlords have seen some unexpected
benefits. Demand for quality rental properties
has continued to be incredibly high. The strained
mortgage market has generated a reluctance to buy
while rates are high or sell when the housing
sector has begun to cool. Many prospective buyers
have put their plans on hold, adding to the
ever-growing need for more rental accommodation.
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Changes to the UK Rental Market in 2023
There are numerous factors at play that have
impacted the rental sector, from the rising cost
of living to the interest rates weve mentioned.
Another element is that many mortgage lenders
have started removing products from the market
altogether or introducing products for new
borrowers with interest rates multiple times
higher than previously advertised.
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• Housing Market Statistics
• The supply of private rented accommodation has
  grown by only 1 in the last seven years, while
  record-high immigration and employment levels
  have contributed to surges in demand. Great
  properties in prime locations are let faster, and
  for more, with discretion about the tenants a
  landlord chooses to rent to.
• Inflation has cooled slightly alongside the
  property market. Houses are appreciating slower,
  with Which reporting annual average growth of
  3.5 a dip from previous market peaks in
  November 2022. Although that is unlikely to
  impact landlord portfolios, residential sellers
  are listing fewer properties, expecting to
  achieve a better value once the economy has
  stabilised.
• High mortgage rates, or the lack of available
  products, have deterred many buyers, choosing to
  remain in rented accommodation until the cost of
  borrowing becomes more manageable.
• Overall, the Office for National Statistics (ONS)
  reports that in the year to March 2023, private
  rental prices increased by 4.9, with landlords
  experiencing very low vacant periods and
  sustained income growth.

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Demand for Private Rented Housing
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The complexity of the economic environment means
that first-time buyers are particularly less
inclined to purchase their first property. High
mortgage costs are part of the puzzle. Still,
another is that higher living costs, often not
matched with wage growth and higher mortgage
repayments, make it challenging to pass lender
affordability assessments. Regardless of the
rent a tenant is currently paying, mortgage
lenders need to assess their income, outgoings
and existing debts to comply with responsible
lending regulations. Most will limit the
borrowing they are prepared to extend to around
four times the applicants annual income. In some
cases, they can offer a higher multiple usually
if the applicant is considered very low risk and
has a strong deposit and healthy credit score.
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Interest Rates and Mortgage Affordability
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A first-time buyer purchasing a home worth the
current UK average house price of 286,489, as of
April 2023, would need a deposit of 10, or
28,649, and a salary of 64,460 over twice the
national average salary. Joint applicants would
need to each have a salary of 32,230 to qualify
for this level of borrowing, some 4 above the
average of 30,992 based on ONS figures.
Although wages grew 6.6 from December 2022 to
February 2023, this also remains far below the
most recent 8.7 inflation figure. Most
households have less disposable income, making it
more difficult to save a sufficient value to use
as a deposit. All of these financial aspects
mean it is harder for people to buy properties,
adding to the demand for rented housing and the
ongoing increases in average rental prices and
yields.
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Generating Stable Rental Portfolio Profits During
Economic Turbulence
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Many landlords are looking at ways to maximise
the performance of their property portfolios,
ensuring they present properties that attract
reliable tenants prioritising excellent housing
standards and the ability to remain in rented
accommodation often as they save towards a
deposit. Previous statistics show that
recession and inflation normally trigger greater
interest in renting. Where there are potential
opportunities to grow rental portfolios as house
prices begin to slow, it could be an optimal time
to buy, the higher costs of mortgage borrowing
notwithstanding. Long-term investments may
become more profitable due to sustained positive
rental yields and future appreciation, especially
for landlords and investors with the capital to
purchase properties without relying on financing.
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Future Projections for the UK Rental Sector
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Property experts are tentatively forecasting that
once the current volatility calms, the housing
market will return to higher rates of
growth. Where some landlords have chosen to exit
the market to avoid exposure to higher borrowing
costs, usually where a fixed-term buy-to-let
mortgage is due to end, this has also been to the
advantage of those with ongoing portfolios. A
smaller pool of properties is available to a
growing number of renters, resolving potential
issues such as price pressures and accepting less
satisfactory tenants to fill a vacant
property. Although care is necessary when
deciding whether to introduce higher rental
prices within an existing tenancy, there is often
the scope to market a vacant rental home at a
higher than previous value based on current
market averages.
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There are also several ways for landlords to
manage rental property costs, such as ensuring
any borrowing products are on an interest-only
repayment basis to mitigate the monthly cost of
borrowing and implementing insurance coverage to
safeguard against late payments to alleviate the
potential impacts on cash flow. For more
information about the right strategic rental
property decisions based on your portfolio and
insights about the ongoing effects on the rental
sector, please get in touch with residential
lettings the experts at Tod Anstee for further
guidance.
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