The Bank of England’s Predictions for Buy-to-Let Landlords
According to the Bank of England, buy-to-let mortgage repayments for landlords will soar by the end of next year.
Financial experts at the Bank predict the cost of mortgages will outstrip rents, rising by almost £300 a month by the end of 2025 and at least £500 a month for more than a million borrowers by December 2026.
A report from the Bank suggests landlords will need to raise rents to repay their loans.
Interest rates are rising as the Bank grapples with inflation.
In December 2021, they rested at a record low of 0.1 per cent but have ratcheted up to five per cent to curb inflation.
Highest interest rates for 15 years
Mortgage rates are at their highest for 15 years after hitting an average two-year fixed rate cost of 6.7 per cent.
Landlords and homeowners coming off fixed-rate deals are the victims of rising interest rates. Most are paying between two and three per cent interest, which will double or treble to the new rate when they switch loans.
The Bank plans to raise rates to make borrowing more expensive. The theory is that this stops people from spending. By buying less, consumers will see prices drop, and interest rates will fall lower.
In the latest Financial Stability Report published this week, the Bank stresses that the uncertain global economic outlook puts homeowners under pressure.
However, the Bank feels that rising mortgage costs will increase, staying below eight per cent, which is lower than the previous peak of ten per cent in the global financial crisis 2007 08.
A profit warning from the Bank of England
“In the private sector, buy-to-let landlords are also being affected by higher interest rates, which along with other pressures, has caused some to sell up, putting downward pressure on house prices, or pass on higher costs to renters.,” says the report.
Landlords have mortgages secured against around seven per cent of the UK’s housing stock.
The Bank explains a combination of factors faced by landlords. As well as rising interest rates, profitability - and, importantly, the ability to repay mortgages - is hampered by changing income and capital gains tax rules, new rent reform laws and proposed alterations to energy efficiency standards.
These factors have led the Bank to warn that landlords servicing high mortgage repayments are the most likely to suffer financial problems as profits dry up.
The Bank is worried that the number of buy-to-let loans meeting interest coverage ratios (ICR) of 125 per cent will soar from three per cent of loans to 40 per cent.
Rent inflation to double?
“Higher interest rates mean an increase in mortgage servicing costs when fixed-rate deals need refinancing, and most buy-to-let mortgages are interest only, which increases the relative impact of higher rates,” says the report.
“The average increase in monthly repayments on buy-to-let mortgages by the end of 2025 is projected to be around £275. If landlords were to entirely absorb higher mortgage costs without passing any of them on to renters, the share of buy-to-let mortgages with ICRs below 125 per cent would increase significantly from around three per cent at the end of 2022 to just over 40 per cent by the end of 2025.”
A big concern is that landlords raise rents to cover increasing mortgage costs.
“Many landlords may seek to raise rents to offset their higher costs. National rent inflation in the private rental market was five per cent year-on-year to May, with one industry estimate indicating a ten per cent price increase in new lets in the year to June.” says the report.
“Renter households tend to have lower incomes than homeowners and are likely to have low savings. Higher costs relative to incomes may lead to an increased reliance on consumer credit, or difficulties paying off existing consumer credit or other types of debt.”
Recent research by property firm Savills shows landlord profits have slipped by four per cent in the past year to their lowest since 2007.
Buy-to-let Interest Rate FAQ
What is the Bank of England interest rate?
The Bank’s monetary policy committee set the rate at five per cent on June 22, 2023. The rate is the amount the Bank pays commercial banks for holding deposits.
Do lenders have to charge the official rate of interest?
No, banks, building societies and other lenders are free to charge whatever interest rate they think fit to borrowers.
What does 125 per cent ICR mean?
ICR is short for interest rate cover and reflects the income a landlord needs to break even on a buy-to-let mortgage.
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Investing in a private rented property can be achieved in a variety of ways. Sometimes landlords inherit a property that they then turn over to renting. Sometimes owners of properties become unintentional landlords because they are unable or unwilling to sell a property at the value the market currently dictates.