Inflation and high interest rates hit renters and landlords – but investors can mitigate impact.
Landlords who locked into a mortgage during the height of the COVID pandemic will reportedly be hit with the highest buy-to-let interest rates since 2015.
According to a report in The Daily Telegraph, landlords face paying more than £1,600 extra a year, while investors who remortgage will be hit with a double whammy of having to pay thousands of pounds extra in interest as well as funding eco-upgrades to their properties in line with regulations.
That’s because in May interest rates have risen from 3.22% to 3.4% for a two-year fixed buy-to-let loan product – the highest in seven years, according to analyst Moneyfacts – while the average five-year rate has increased for the third month in a row, up from 3.42% to 3.56%.
The report noted that lenders had replaced rates with higher pricing daily following the Bank of England’s decision earlier this month to increase rates to a 13-year high from 0.75% to 1% in an effort to curb inflation.
However, according to separate research by GetGround, a buy-to-let company and management platform, investing even partially through limited companies can help landlords mitigate the impact of rising inflation better than if they were to invest in property in their own names.
Three quarters of those surveyed (76%) said that limited companies allowed them to adjust more easily to rising inflation, while a similar proportion (73%) revealed that limited company investing made them feel more protected against inflation.
The findings come as property investment through limited companies reportedly continues to grow, with GetGround revealing that up to 81% of UK landlords of the companies it surveyed hold at least a quarter of their property portfolio in limited companies.
Moubin Faizullah Khan, CEO of GetGround, said: “Whether it’s because of its financial, administrative or time-saving benefits, it’s unsurprising that a limited company structure is recognised as a useful defence mechanism against the impact of inflation.
“In this unprecedentedly high inflation environment, limited companies prompt greater responsible investment, too. By moving to a limited company structure, landlords reduce the costs of running their property investments, making them better placed to keep rents at an affordable ‒ while still profitable ‒ level for their tenants.”
GetGround’s research also suggested that landlords with single investment properties or smaller portfolios were less likely to choose limited company structures than those with larger portfolios.
Faizullah Khan added: “At a time when some smaller landlords might question the long-term viability of property investing, the industry can and must do more to dispel myths and misunderstandings that surround limited company investing.
“Gaining a better perspective on the investment structure could be the deciding factor for many of these people when they consider whether or not being a landlord continues to be the right thing for them.”
Renters hit financially
Meanwhile, according to new research by Play Like Mum, the average cost for a monthly rent for a three-bedroom house has now risen to £1,287, representing a 47.4% increase in 10 years.
Analysing historical data based on factors such as renting, bills and broadband from the past 10 years, the study attempted to calculate how the cost of housing had changed over the last decade.
It found that housing as well as rental prices had increased rapidly during that period. Since 2011, the average monthly cost of renting a family-sized house or apartment has risen by £414, representing a 47.4% jump.
The data comes after another report revealed that the number of UK rental properties has soared by more than 1.1 million over the last 10 years.
There are now roughly 10.5 million rental properties – accounting for 35.7% of all UK dwellings – compared to about 9.4 million a decade ago, according to research by specialist rental platform Ocasa.
Continued Base Rate Rises Sound Alarm Bells For Borrowers
Interest rate increases are being drip fed.
Continued increases to the base rate by the Bank of England have made borrowers conscious of their product end dates.
Colin Bell, co-founder and chief operating officer of Perenna, spoke to borrowers’ concerns amidst rate hikes by the Bank. “The Bank of England’s decision to further increase interest rates to 1% will sound the alarm bells for borrowers who are on Standard Variable Rates (SVR) or approaching the end of their product term,” he said.
The bank’s Monetary Policy Committee (MPC) voted to increase the base rate to 1% at the beginning of May, representing the fourth consecutive increase and its highest level in 13 years.
According to Bell, in order to avoid large shocks, the interest rate rises are being drip fed, but he said this is starting to have an impact as it coincides with sizeable cost of living increases.
There is little doubt that these rises will negatively impact those with mortgages on an SVR and other variable debt, meaning they will need to pay more each month at a time when they are also having to combat rising expenses elsewhere.
As a result of inflation reaching its highest level in 40 years, combined with the war in Ukraine and the energy bill crisis, many are struggling across the country financially.
Bell said that lenders are now pulling mortgage products from the market, and average rates on two-year fixes recently reached seven-year highs.
“Consumers are now finding it harder than ever to get onto the property ladder,” he added.
As flexible long-term fixed rate mortgages are not impacted by interest rate rises, Bell believes they can provide a solution to the problem, allowing individuals to better manage their monthly outgoings.
Indeed, for prospective homebuyers, long-term fixed repayments offer peace of mind, especially during these periods of record inflation.
As such, Bell explained that it will be unsurprising if we witness increased numbers choosing to take protection from long-term deals as 2022 continues, now that we are seeing interest rate cycles that have not existed for over a decade.
“Many five-year fixes are currently priced at a lower rate than two-year deals,” said Conor Murphy, chief executive and founder of Smartr365. However, Murphy added that the wider circumstances of this do need to be taken into consideration.
He outlined that the past two years have reminded us of how fast personal and economic conditions can change, and some people will be put off by the thought of locking in for longer.
“Flexibility is an important factor for a lot of people, so they will have to weigh up whether they want to prioritise cheaper rates or the ability to swap more easily,” he added.
An estimated 17% of households in the UK have been unable to save during the last two years due to the pandemic.
Many experts within the industry are expecting economic conditions to worsen over the course of the year, as more people are forced to use their savings in order to combat the cost-of-living crisis.
Danny Belton, head of lender relationships at Legal & General Mortgage Club also believes the Bank of England’s decision to increase the base rate, coupled with the financial pressure of the inflation crisis, is likely to prompt some borrowers to seek long-term fixed rate mortgages that offer a sense of security against further rate increases.
“Although a number of customers have already locked into new rates, pricing of longer-term fixed rates has become more competitive with more choice which may encourage more borrowers to act quickly to secure a deal that can help minimise their monthly outgoings,” he said.
Against these challenging market conditions, Belton outlined that the value of advice remains paramount.
He believes aspiring homeowners may be concerned by the news and could benefit from the support of an adviser to source a deal that suits their unique circumstances.
“This is an opportune moment for advisers to demonstrate their expertise and help both first-time buyers and those looking to remortgage to find the right solution for them,” he said.