The Bank of England has risen interest rates to 0.75%, an increase of 0.25% and to the highest level in nearly a decade. Are landlords likely to raise their rents to cover the costs, will it hardly impact their finances for a while, or could they benefit on the effect it’ll have on the whole housing and rental market? There are different opinions and projections coming from the property and finance industries and it seems they vary depending on which situation landlords are in and what type of mortgages they have.
Fixed Rates Provide Immunity as More People Could Turn to Renting
If landlords rely on a mortgage they have been urged to move swiftly with any new property purchases as borrowing costs are now expected to rise.
Chief Executive of mortgage broker Property Master, Angus Stewart, said, “Landlords who are looking to borrow to buy a new property or refinance their existing portfolio may need to move very fast indeed if they are going to benefit from some of the good deals we have seen.”
However, data from online letting agents Upad indicates more than 50% of landlords are on fixed rate mortgages so it won’t impact their repayments because they’ll stay the same each month. With more competitive mortgage products on the market it could even mean landlords making lower repayments in the future.
James Davis, Founder and CEO of Upad, is saying landlords should look at the bigger picture of how the mortgage interest rates affect the housing and rental market. He said, “On the one hand, there’s an on-going lack of affordable housing for purchase which maintains a level of buoyancy in the rental market. At the same time, this small rate increase could knock confidence in the housing market, meaning people choose to rent for longer.”
In either of those scenarios he believes those landlords don’t need to worry and can in fact benefit from the interest rises. The industry will be monitoring all affected parties to see if this turns out to be the case. Landlords borrowing on a five-year fixed rate mortgage won’t feel the change until their current deal runs out. Longer term fixed rate products could become more widespread as borrowers want more financial stability.
Shaun Church, Director at Private Finance, said, “10-year fixed mortgages provide a decade of immunity against rising rates and the average cost is relatively low at just 2.74%, compared to 1.73% for a two year fix.
“However, they often come with early repayment charges if borrowers switch their mortgage deal before 10 years is up.” He thinks lenders should offer greater flexibility as the demand moves towards long term products.
A Blow for Buy-to-Let Investors
Buy-to-let property owners who are on mortgages that have variable or tracker rates will face the brunt of interest costs. As well as increased interest repayments, accountants are warning how for the current tax year, they will only receive full interest relief on 50% of the cost of interest incurred, with the other 50% only receiving basic rate tax relief. Accountancy firms are pointing out to investors that the amount eligible for a full interest relief will reduce by a further 25% from April 2019. From April 2020, interest incurred will only attract basic rate tax relief. Many buy-to-let landlords and property owners will not have yet calculated the position the reduced interest relief will have had on their profits from 2017/18.
Rental and property marketplace firm TheHouseShop carried out research earlier in 2018 and found nearly one in three landlords were planning to raise rents over the next year to help cover increased running costs of their rental business.
Nic Marr, co-founder of TheHouseShop, thinks if mortgage lenders increase their rates then even more landlords could raise their rent fees, from 2% to 4%. He added, “Unfortunately, this could mean that tenants end up taking on the cost of the rates rise, as buy-to-let landlords, in many cases, price their rental properties according to their mortgage repayments.”
Who is Affected Most?
Most banks and building societies are expected to pass on much of the interest rate rise to their savers and borrowers. It will be welcome news to the savers who have yet to invest in a property and have seen lower rates on their savings during the past decade.
The rise is likely to affect those landlords with a buy-to-let mortgage on a variable or standard variable rate. If the industry research is a true reflection, then it would seem the interest rate rise won’t impact negatively on a majority of landlords and if it causes an increase in new tenancies then they can all stand to benefit. When starting a new tenancy make sure to protect your investment by having an expert carry out a comprehensive check-in report. Assist Inventories provide a full range of professional inventory and check-in services across London to satisfy all parties.