In Focus: Home ownership  

Borrowing costs are now the biggest threat to landlords

Nathan Emerson

Nathan Emerson

The buy-to-let sector has been hit hard by the sudden and sharp interest rate rises of recent weeks.

It’s clear rising borrowing costs are the new biggest threat to the estimated 40 per cent of private landlords who fund their investments with a mortgage.

Prior to the September "mini" Budget, letting agents will have pointed to a mounting tax and regulatory burden over the past decade that has conspired against large numbers of their landlords.

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In the most recent English private landlord survey, published in May, one in 10 landlords said they did not intend to re-let a property when the current tenancy came up for renewal, with more than half blaming legislative changes.

Our research shows as many as half of rented homes sold by their owner have not returned to the rental market.

Then there are those being lured to the short-term let market where regulation is looser and margins higher. Our recent survey of property agents found 45 per cent of letting agents reported more short-term lets on their patch.

However, that sentiment appears to be changing. In an online poll earlier this month, agents told us rising mortgage costs are now the main reason their landlords are selling, with legislation and regulation coming second.

The best estimate is that as many as 70 per cent of BTL mortgages will need to be renewed over the next 18 months.

For private landlords, who 11mn people rely on to house them, the decision on what they do next will come down to simple economics.

The mortgage industry is sympathetic towards its BTL customers but warns lenders will need to remain cautious with their rates in the short term because of fears around ongoing volatility in the markets.

Nationwide Building Society’s chief financial officer Chris Rhodes told the Treasury Committee recently that for landlords needing to fund property purchases with a mortgage, it will be "marginally profitable, if not loss-making" as a result of higher borrowing rates.

The Bank of England’s revised forecast of a lower peak in its base rate has calmed the market. But lending rates are still more than double that of a year ago.

Higher interest rates have also pushed up the level of stress testing on buy-to-let products, further hampering landlords’ borrowing ability.

Rhodes said lenders will need to remain cautious with their rates in the short-term because of fears around ongoing volatility in the markets.

The next milestone is November 17, when the prime minister and his chancellor will deliver their fiscal statement. How the markets react could be a pivotal moment.

This cautious pessimism creates something of a conundrum for those considering investing in the private rented sector: do they take a longer-term view that property is a worthwhile investment over time and focus on capital investment over a monthly income?