Hire-purchase landlords under pressure from rising mortgage rates

Rising interest rates are putting pressure on rented landlords, forcing some to consider selling property or finding higher-yielding homes outside the expensive regions of southern England, property market experts say.

Like most banks and building societies in the residential mortgage market, lenders pulled hundreds of fixed-rate loans from landlords in the days after last Friday’s “mini” budget.

According to mortgage broker Property Master, nearly 40 lenders have withdrawn their buy-to-let fixed-income products since Chancellor Merkel’s speech. Angus Stewart, Chief Executive, said that landlords’ diminishing choice in the mortgage market “would have a further impact on rising mortgage costs”.

When these products return, they are expected to carry much higher interest rates to reflect the rise in wholesale borrowing costs for lenders and market expectations of future increases in the Bank of England’s main interest rate.

“We expect a further tightening [lending] criteria given concerns about market and economic conditions,” Stewart said.

Jeni Browne, sales director at brokerage Mortgages for Business, said a handful of lenders have already re-rated their fixed-rate deals, but at “incredibly expensive” rates of around 7 percent, down from around 2 percent earlier this year.

Among the criteria that lenders use to assess the affordability of a rental is a calculation of rental income versus interest costs. This previously gave lenders and borrowers scope for rate hikes. However, some lenders have begun to tighten this “rent-to-interest” bill.

Those looking to refinance with another provider may no longer pass that test, she added, although they would still be able to take out a new loan, known as a product transfer, with their existing lender. “Some landlords may find they have trouble making a debt restructuring in the future,” Browne said.

Aneisha Beveridge, research director at real estate brokerage Hamptons International, said the higher rates at which landlords are being forced to reschedule are putting some of them at a loss.

Calculations by Hamptons showed that a higher-tax-paying landlord, with an average return of 6.1 per cent, who rescheduled in the last month would see its annual net profit fall 72 per cent, from £3,198 to £884. Assuming the Bank of England’s half-point base rate hike last week was passed through to mortgage costs (before accounting for the impact of the ‘mini’ budget), this would reduce the average profit to £212 a year.

If policy rates rise to 2.5 percent from 2.25 percent, only those with properties with yields greater than 7 percent would continue to make profits, the agent said.

“This is one of the main reasons why London-based investors are increasingly buying buy-to-lets outside the capital and targeting higher-yielding areas. So far this year, a record two-thirds (66%) of London-based investors have chosen to buy a property for rent outside the capital, up from just 26% a decade ago,” said Hamptons.

Aside from selling or buying elsewhere, other options for landlords looking for higher returns include investing in multi-family homes (HMOs) for higher rental income; Switching to a limited liability company to take advantage of tax breaks on mortgage interest payments; or curb their new acquisition ambitions by buying a smaller home.

Landlords might also try to pass some or all of their higher mortgage costs on to their tenants. However, sharp rent increases this year, combined with the financial burdens of rising inflation, will limit their ability to do so.

Ben Beadle, executive director of the NRLA, which represents landlords, said her research showed landlords would much rather have a reliable long-term tenant than risk being left with an empty house because of unbearable rent increases.

“But it usually depends on individual circumstances and the ability of the owner to absorb both [higher interest payments] or the ability of the tenant or property to justify higher rents,” he said.

An increase in the number of landlords with a need for refinancing is expected over the next 12 months. A 2016 stamp duty surcharge on purchases for subletting and new credit restriction rules in 2017 led to a surge in purchases by landlords before those rules came into effect. Many of those who signed up for five-year, fixed-rate contracts at the time are now seeing their fixes running out.

Of the 1.3m buy-to-let fixed-rate mortgages in June 2022 (out of just over 2m in total), around 220,000 should mature in the 12 months to June 2023, according to industry body UK Finance. Another 250,000 is due in the 12 months to June 2024.

The typical private rental sector borrower uses interest rate loans, which amplify the impact of interest rate changes on their monthly payments compared to those who pay principal and interest together. But lenders limit landlords to borrowing more than 75 percent of a property’s value, making them less vulnerable to falling home prices than, say, a first-time buyer with a 90 percent LTV mortgage.

https://www.ft.com/content/567fa407-cf8c-4fde-bdcd-3bbdc2d525af Hire-purchase landlords under pressure from rising mortgage rates

Adam Bradshaw

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