UK interest rate rises could affect buy to let landlord expansion, it is claimed
UK landlords are being advised to be cautious when considering expanding their buy to let portfolios due to a risk that interest rates could rise sooner than expected.
With unemployment down and wage growth rising above inflation for the first time in years the historic low interest rates seen in the UK could start to creep up, according to Landlord Assist, a nationwide tenant eviction and referencing firm. It says that while the UK buy to let market may be currently experiencing a shortage of property caused by exceptional demand, landlords considering taking advantage of historically low interest rates to expand their portfolios need to think ahead. According to Graham Kinnear, managing director at Landlord Assist, rising mortgage rates could see the costs associated with being a landlord escalate in the near future. At the same time a resurgent property market, stimulated by the government’s Help to Buy scheme could mean that rent prices will fail to keep pace with rising mortgage rates. According to Kinnear, it is almost impossible for landlords to increase their rents to cover the anticipated rising rates, as most tenants have already reached a ceiling in what they can afford to pay due to rising living costs and pay freezes. ‘Many landlords are itching to take advantage of the current shortage of rental accommodation and historically low interest rates, but they need to be mindful that the general cost of being a landlord could increase considerably over the next few years,’ he said. ‘It is inevitable that interest rates will increase over the next 18 months and this will impact and possibly remove the profitability of buy to let for those who use mortgage finance to fund their portfolio. It is likely that the base rate could reach 3% over the next three years and this, in addition to a current margin of 3.5% on buy to let funding, could see landlords paying a rate upwards of 7% on some mortgages,’ explained Kinnear. ‘For landlords who purchased a property for £100,000 with an interest only buy to let mortgage of 70%, that would typically achieve a rent of £500 a month, a rate of 7% would see their mortgage payment rise to approximately £408 each month,’ he pointed out. ‘Add to this the typical management fees charged by estate agents and they will do well to break even. That’s before they take into account void periods, repairs and service charges which could force them to be running at a loss,’ he added. Kinnear explained that while, when faced with rising mortgage rates, landlords would typically seek to increase their rent prices, it will be extremely difficult for landlords to raise their rents at the same pace as interest rates going forward as overwhelming demand has already forced rents rise to reach record levels. ‘Our advice to landlords is to stress test any borrowing at a level of 7%, seek cheaper mortgage deals for existing properties and, where possible, obtain a mortgage for new purchases up to a maximum loan to value of 65%,’ said Stephen Parry, commercial director at Landlord Assist. ‘Those considering becoming a landlord need look at the long term attraction of buy to let, and should be looking to maintain their investment for at least 10 years for the figures to really work in their favour. Buy to let will still be profitable in the long-term if landlords are prepared to ride out the anticipated changes,’ he added.