You are here: Home - Mortgages - Buy To Let - News -

Rental crisis ahead as landlords bear the brunt of mortgage chaos

0
Written by: Emma Lunn
02/11/2022
Landlords will face a stark choice between upping rents to break even or selling up due to an increase in mortgage costs, according to mortgage experts.

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.”

Loss-making buy-to-let

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.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Your right to a refund if travel is affected by train strikes

There have been a wave of train strikes in the past six months, and for anyone travelling today Friday 3 Febru...

Could you save money with a social broadband tariff?

Two-thirds of low-income households are unaware they could be saving on broadband, according to Uswitch.

How to help others and donate to food banks this winter

This winter is expected to be the most challenging yet for the food bank network as soaring costs push more pe...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week