Landlords will struggle to find a BTL mortgage deal as rates rise

The buy-to-let mortgage market is facing a challenging time as interest rates rise and lenders tighten their lending criteria and toughen up stress testing.

The Bank of England has raised interest rates 12 consecutive times to hit 4.5% - the highest the base rate has been since 2008.

And it looks like the Bank of England will raise rates at least twice more - including this month.

The Chancellor Jeremy Hunt also says that the BoE will have no choice but to raise rates to 'calm inflation'.

But that won't calm the UK's mortgaged BTL landlords who are seeing their costs rocketing and profits falling.

Average profit of 23% of their rental income

Just this week, the real estate firm Savills revealed that a landlord was, on average, making ‘year 1’ cash profits on a rental income of 23% between 2014 and 2021.

However, this profit has now fallen to 3.9% - that's the lowest since 2007.

The firm's Lucian Cook is the head of research, and he says: "Following a boom period for buy-to-let landlords, 2023 marks a turning point for Britain's private rented sector.”

He also says that the Renters' Reform Bill, the abolition of the Assured Shorthold Tenancies for periodic ones and the proposed EPC regulations are making landlords cautious when it comes to investing.

Mr Cook adds: "There is a very real risk that landlords will exit the sector, particularly those with high levels of borrowing, putting increased pressure on a sector where demand significantly outweighs supply in many locations."

Fixed mortgage deals are disappearing quickly in the buy-to-let sector

And, according to Moneyfactscompare, fixed mortgage deals are disappearing quickly in the buy-to-let sector, leaving landlords struggling to find deals.

The platform's finance expert, Rachel Springall, said: "The volatility surrounding interest rates towards the tail end of 2022 started to improve, but as it stands, average rates are expected to keep climbing because of the ongoing concerns over future interest rate hikes."

Its research reveals that the average rate on a BTL fixed two- and five-year mortgages has rocketed to 5.61% and 5.52%.

Pass on some of the increased costs to their tenants

No doubt some landlords may be able to pass on some of the increased costs to their tenants through higher rents, but this may not be possible in areas where there is low demand or high competition.

Other landlords will decide to sell up and exit the market, reducing the supply of rental properties.

And for a landlord who can access a new BTL mortgage deal, there will be restrictions.

For example, NatWest has already revealed that its buy to let stress tests – that is a check on whether the landlord’s rental income will cover a higher mortgage rate - will be much tougher.

In a statement, the lender says that the stress test for a two-year fixed rate will rise from 6.7% to 8.10% - a five-year fixed deal will increase from 6% to 6.89%.

Rates anticipated to reach 6%

The situation isn't likely to improve soon with rates anticipated by some property market experts to reach 6% by the end of the year.

Simon Thompson, the managing director of Accommodation for Students, said: "These are difficult times for all landlords in the private rented sector.

"Rising interest rates will affect gearing so for those landlords who don't have much equity or have a high LTV, things could be tight.

"They might decide to sell up if they can't get finance or make the numbers work - and that will, inevitably, push up rents."

He added: "The next Bank of England rates decision will be crucial, but lenders are already leaving the BTL market or are pricing in rate rises.

"The era of cheap money is over for now, but we will need incentives for landlords to remain in the PRS.

"I would suggest that the ability to deduct most finance costs, including the mortgage interest, would be very welcome."

www.accommodationforstudents.com is the UK’s leading student accommodation website. We are currently experiencing a sharp growth in the number of HMO enquiries. If you have a property you would like to let to students find the information you require here.