Homeowners are warned to prepare for an increase in mortgage rates that will force many to sell or create financial misery for their tenants with rent increases.
The increases could squeeze hundreds of thousands of homeowners who invested in buy-to-let properties for old-age income.
Last week, more than 1,000 mortgage deals were withdrawn from the market, according to rate scrutiny Moneyfacts. Of the approximately 850 rent-to-own offers still available, homeowners now must pay an average mortgage rate of 5.26 percent for a five-year fixed-rate offer. A month ago, such a deal averaged 3.25 percent.
Mortgage chaos: More than 1,000 mortgages were withdrawn this week amid concerns over rising interest rates
On a £300,000 mortgage, this could equate to an extra £500 in monthly payments. Mortgage rates rose after the Bank of England raised the base rate to control inflation.
Last December, the base rate was just 0.1 percent, but now it has reached 2.25 percent. Financial markets predict it could rise to 6 percent by spring.
The National Association of Residential Owners believes that this is not the time to panic. Its director of policy and campaigns, Chris Norris, says: ‘Keep calm. No one is sure what will happen next, but take this opportunity to consider your future plans.
“Those with three months or less left on a fixed-rate agreement could start looking right now, as lenders can sign up new homeowners on a future agreement beginning a few months from now.”
Rent-to-purchase mortgage rates tend to be higher because they are considered riskier.
About 90 percent of rental purchase loans are interest-only, where you pay the interest charges on your loan and not the original principal borrowed.
Moneyfacts notes that even though the average mortgage offers are above 5 percent, there are still some competitive offers, though more are being withdrawn every day.
Among today’s best buys is a 4.39% two-year fixed rate buy-to-lease offer with NatWest for up to 60% loan-to-value with no origination fee.
For a five-year fixed deal, NatWest offers a rate of 3.89 per cent again for a maximum 60 per cent loan-to-value mortgage and a £995 deal sensation.
Meanwhile, TSB is offering a two-year tracker buy-to-let mortgage that charges 1.89 percentage points above the base rate for a 60 per cent loan-to-value, also with an origination fee of £995.
Lee Grandin, owner of buy-to-let broker Landlord Mortgages, agrees now is not the time to panic.
He says: ‘Remember, there is still a shortage of property available to rent in major cities, such as London. So if mortgage rates go up, maybe you should consider raising the rent instead of just selling it.
However, not all landlords will be able to pass through rate increases, as renters also face rising costs and may not be able to pay more.
“Homeowners need to remember that they’ve been coddled with low rates for years,” Grandin adds.
Another major concern for buy-to-let landlords is the risk of a housing crash, partly driven by homeowners and homeowners being forced to sell because they can no longer pay their mortgage and other bills.
Should I sell or bet I can weather the storm
Hannah Pike fears she may have to sell her two buy-to-let properties next year if interest rates continue to rise.
The 42-year-old mother of two must re-mortgage a £462,000 three-bedroom semi-detached property in Wokingham, Berkshire, and a £380,000 two-bedroom semi-detached house in the Oxfordshire town of Thame within the next two years. . years.
Dilemma: Hannah Pike is having sleepless nights over interest rates
Hannah, a part-time personal assistant from Wokingham, says: ‘Something has to give and the turmoil in the housing market is giving me sleepless nights. Should I cut and run, or bet I can weather the storm. But the latter means an increase in rent for tenants.’
She adds: ‘I want to keep the properties so that one day I can pass them on to my children. But if I do this, it will mean raising the rent for the Wokingham property from £1,500 to perhaps £2,000 a month, and for the Thame property from £1,100 to £1,350.
“It’s not about making money with my tenants, it’s about keeping my head afloat and not getting into debt.”
House prices for the 12 months to July were up 15.5 percent and averaged £292,000, says the Office for National Statistics.
Many fear that this level of growth is unsustainable and could end in a collapse: commentators have predicted that house prices will fall by 10 to 20 percent over the next two years.
Because buy-to-let borrowers tend to opt for interest-only mortgages, they rely on capital appreciation as part of their investment plan. If the value falls, they could be out of pocket.
Owners are already feeling the pinch with a series of tough new measures being introduced to improve environmental and safety standards.
This started last year with new electrical safety rules, where every five years an Electrical Installation Condition Report (EICR) – wiring and socket check – must be completed.
Such certificates can cost £1,000 because electricians have to go through the entire house to give you a clean bill of health. If rewiring is necessary, repairs can cost thousands of pounds.
New legislation on Energy Performance Certificates (EPCs) is also being introduced, meaning that from 2025 rental properties must have a minimum EPC of ‘C’. Today, only four out of ten homes reach this required level.
This is because older properties, many of which are rented, tend not to have well-insulated walls or ceilings and have drafty windows. The cost to rectify many Victorian properties can be in the tens of thousands of pounds.
There are also concerns that an expected tenant reform bill, due to be implemented next year, could scrap a ‘section 21’ clause on no-fault evictions.
This means that even if a landlord has a good reason for asking a tenant to move, such as non-payment of rent, they may face the potentially costly process of having to take the case to court.
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