Rental crisis ahead as landlords bear the brunt of mortgage chaos
The issues facing landlords, and the knock-on effect on renters, were discussed at a Treasury Committee meeting this afternoon exploring the current state of the mortgage market.
At the meeting, Ray Boulger, senior technical director at broker John Charcol, warned that the recent mortgage mayhem could have “a serious impact on the availability of rental property in the next year or two.”
In a one-off topical session, MPs questioned mortgage industry representatives about how the mortgage market is working, and the fallout from Kwasi Kwarteng’s disastrous mini-budget in September.
Charles Roe, director of mortgages at UK Finance, told the committee how the mini Budget had led to mortgage lenders withdrawing products from sale in order to accurately re-price them so they represented fair value for borrowers.
Boulger explained how landlords coming off two or five-year fixes since the mini Budget in September faced going from an interest rate of about 2% to around 6%. With most landlords paying buy-to-let mortgages on an interest-only basis, this means many landlords faced monthly payments going up by 200%, compared to a rise of about 50% for owner occupiers with repayment mortgages.
Stress test safety margins
Lenders assess buy-to-let affordability by looking at criteria which includes a calculation of loan-to-values, stress testing, and rental income to repayment costs.
Previously, rent levels and property values gave both lenders and landlords the necessary safety margins. But the fallout since the mini Budget means some mortgage lenders have tightened up these criteria for landlords remortgaging.
Mortgage lenders are obliged to carry out ‘stress tests’ on borrowers to check they could still afford their mortgage if interest rates rose by a certain amount.
“The stress test is a big issue for landlords, especially in London and the South-East where yields are low anyway. Many landlords will only be able to borrow at 50% loan-to-value (LTV),” said Boulger, “Landlords needing to borrow more than 50% of a property’s value will find it very difficult.”
Boulger said that prior to the mini Budget, lenders were carrying out stress tests on landlords at interest rates of 6.75% or 7%, but now stress testing was taking place at 8%. He said this criteria change was making it more difficult for landlords to refinance.
“It will impact renters’ ability to find property and also the rent they will have to pay,” he said. “This will be a major challenge over the next year or two.”
Chris Rhodes, chief finance officer at Nationwide Building Society, was also at the Treasury Committee meeting and backed up Boulger’s view. He said: “Buy-to-let will be loss-making for most landlords buying now. Landlords coming off fixed rates of about 2% will now have to pay about 5%.”
Boulger’s and Rhodes’ views about the buy-to-let mortgage market are echoed by what mortgage brokers are experiencing when they talk to clients.
Chris Sykes, technical director at brokerage Private Finance, said: “We are starting to see examples of our landlord clients who cannot remortgage their buy-to-let property unless doing a product transfer with their existing lender due to significant changes in the buy-to-let market and higher rate environment,” he said.
“The market has certainly become tough for landlords, and many will find their business models are not viable in this high-rate environment with tougher legislations. Landlords also have to pay tax on their rental income if a rental property is owned in their personal name, meaning landlords will have to increase rents just to cover their mortgage payments.”