Britain’s small time buy to let landlords could be in line for a shock, as interest rates rise. Many could see their cash flow turn negative by 2017 as rising mortgage rates collide with a practical ceiling on the amount tenants can afford to pay.
The situation could present many small landlords – those with typically just one property – with a headache, that could trigger a round of selling out of the sector. At the same time, the change could present institutional investor landlords – many of whom are poised on the edge of the market – with an opportunity to buy into the sector. Their longer term interest, and access to finance that is not prone to the short term fluctuations of the UK mortgage market, could still offer the opportunity for good medium term returns from the UK private rented sector.
The problem has been flagged up by the Telegraph newspaper, which has researched the impact of rising interest rates on buy to let mortgages. It notes figures from the Council of Mortgage Lenders showing that mortgage lending to landlords has increased 44% since the end of 2011. And rates being offered to buy to let landlords are lower than they were even in the property boom years of 2005 and 2006.
Taking comments from Bank of England governor Mark Carney, about a “return to normal” that will see interest rates rising to potentially 3% by 2017, the Telegraph has mapped the likely impact on these cheap landlord mortgages. Currently such loans are offered at bank base rate plus 3.4%; were that margin to be maintained, then a landlord would be faced with a 6.4% interest rate in 2017. Assuming a 70% loan to value mortgage, a current average £633 per month mortgage on a London rental property will rise in cost to £1,088; the return to a landlord will drop from £458 currently, to £33 per month – not enough to cover rental voids or maintenance costs.
Any hopes of increasing rents to cover rising costs are dashed by the view of specialists in the letting sector who warn of a “rent ceiling” in many places – dictated by increasing supply, and the fact that many renters are already squeezed by rising living costs, and wages that are static.
More from the Telegraph here.