According to recent data from Hamptons, there’s a financial storm brewing for landlords. Mortgage interest payments have surged by a staggering 40% compared to last year. This upswing means that, as of August, landlords with mortgaged properties are now relinquishing an average of 37% of their rental income to cover mortgage expenses, a substantial increase from the 28% seen just a year ago and far higher than the 24% observed in November 2021 before the tide turned on interest rates.
What’s particularly noteworthy is that this mounting pressure comes despite a decrease in the total number of buy-to-let mortgages since November 2022. This decline indicates that several investors might have reduced their debt or exited the market altogether.
The Rental Paradox: Rising Costs amidst Rising Rents
Intriguingly, this financial squeeze is happening against a backdrop of soaring rental prices. Hamptons reports that annual rental growth across the UK maintained a robust double-digit increase during September, with an average hike of 11.7% compared to the same period in the preceding year. Despite this, the escalating mortgage costs are taking a bigger bite out of landlords’ potential profits.
Currently, the average two-year fixed buy-to-let mortgage rate stands at a hefty 6.24%, as per Moneyfacts data. To put this into perspective, a landlord seeking a £200,000 interest-only mortgage would now be shelling out an average of £1,040 monthly if they opt for a two-year fixed rate. This financial commitment, coupled with other unavoidable expenses such as property maintenance, agent fees, insurance, and compliance checks, underscores the necessity for rental income to continue its upward trajectory for landlords to remain profitable.
A Closer Look at the Numbers
At the prevailing average interest rate of 6%, Hamptons’ calculations suggest a sobering forecast: nearly two-thirds of the rental income accruing to mortgaged landlords will be devoted to servicing mortgage interest alone. This scenario has landlords shelling out an additional £4.3 billion annually compared to August 2022, a 40% jump that equates to a total of around £15 billion in mortgage interest.
The average rent in the UK is now £1,325 per calendar month (pcm), a significant leap from £1,186 in September 2022. Despite this increase, the profit margins for landlords are being eroded due to the disproportionate rise in mortgage expenses.
Fixed Rates: A Temporary Reprieve?
Many landlords have so far been cushioned from the full brunt of these rate hikes thanks to their existing fixed-rate deals. Data from UK Finance shows that there are approximately 2,030,000 buy-to-let mortgages still outstanding, the majority of which are on fixed rates. Specifically, about two-thirds of these mortgages are on fixed rates, with the rest on either tracker rates or standard variable rates.
However, this relief may be short-lived. As these fixed-rate periods conclude, landlords will likely face steeper costs unless there’s a substantial reduction in interest rates. Hamptons anticipates the collective mortgage interest paid by landlords could surpass £20 billion in the next two years if the Bank of England doesn’t reverse its rate-raising course.
The Silver Lining: Falling Rates and Strategic Choices
The clouds may have a silver lining. Recent weeks have seen a slight relaxation in mortgage rates, providing a glimmer of hope. While the average rates for both two-year and five-year fixed deals hover above 6%, some deals are now available below the 5% threshold.
For instance, The State Bank of India’s UK arm (SBI UK) is presenting a 3.9% two-year fixed rate for those with a substantial deposit or equity of at least 50%. There’s a catch, though – a hefty 5% arrangement fee. Most of the more competitive deals, just below the 5% mark, also carry significant arrangement fees, an important consideration for landlords.
At a 5% interest rate, Hamptons’ analysis indicates that a typical landlord with a mortgage will spend 54% of their rental income on mortgage interest alone. These figures highlight the delicate balance landlords need to maintain to stay profitable.
Nicholas Mendes, a mortgage technical manager at the mortgage broker firm John Charcol, acknowledges the tough decisions landlords are facing. He notes an uptick in landlords opting for shorter-term fixed rates or variable terms for added flexibility, possibly to facilitate the sale of properties if necessary. Moreover, some landlords are reluctant to increase rents annually, understanding the financial strain on tenants, but reality strikes hard at renewal times.