Buy-to-let landlords face ruin as mortgage rates rocket.

Jeremy Hunt, the new Chancellor, will unveil a package of economic policies later this month, but regardless of his interventions, landlords will face significantly higher interest rates when their current loans expire, experts have warned.

Tenants will be unable to afford higher rents because of the cost-of-living crisis and growing tax burden. Analysts have warned that Britain is on the cusp of a “buy-to-let explosion”. 

If landlords who come to the end of a fixed-rate deal in 2023 or 2024 have to pay mortgage rates that are four percentage points higher than currently, more than half will be unable to remortgage unless they raise rents, according to Moody’s, a credit rating agency. 

In this ­scenario, these landlords would have to raise rents by 27pc in order to be able to refinance, it warned. Nearly two thirds of all fixed-rate buy-to-let mortgages will expire by the end of 2024, according to Moody’s, which analysed a sample of 52,000 loans.

Andrew Goodwin of Oxford Economics, an analyst, said landlords might be unable to raise rents enough because their tenants would be unable to pay.

He said: “Renters are coping with severe falls in real wages and the economy is contracting. It will be really tough for landlords; they are getting squeezed from both sides. The whole market has become accustomed to low interest rates. The viability of buy-to-let is based on that.”

As well as rising costs, renters must grapple with a growing tax burden. Mr Hunt warned on Friday that “some taxes will have to go up”.

Even if mortgage rate rises are slowed or halted by Mr Hunt’s actions, landlords will still face much higher costs than before as rates rise globally. 

Paul Cheshire, a former government adviser and emeritus professor at the London School of Economics, said: “We still have external pressure on interest rates.” 

Lenders judge affordability for buy-to-let mortgages by comparing gross rental incomes with interest payments via a measure called the interest coverage ratio (ICR). If an investor’s mortgage payments rise, they will have to raise their rent to maintain their ICR. 

Banks require a minimum ICR of 125pc for ­limited companies and basic-rate taxpayers, and 145pc for ­higher-rate taxpayers. A four percentage point increase in mortgage rates by the end of 2023 would push 30pc of properties with expiring fixed-rate deals below their minimum ICR requirement. 

To be able to remortgage, these landlords would need to raise rents by 12pc. If the four percentage point increase were maintained until the end of 2024, the share of properties failing the minimum ICR requirement would surge to 54pc. These landlords would need to raise rents by more than a quarter to meet their lender’s affordability criteria. 

Jamie Finch, 64, is a landlord with 10 properties in London. All are on ­variable-rate mortgages at around 3.25pc. Mr Finch calculated that if this rate climbed to 5.5pc he would be paying an extra £100,000 in interest. This is less than he earns from the business.

“I would go bankrupt or I would have to sell,” he said. 

If large numbers of landlords sell up, house prices could fall much further than the 10pc to 15pc that Oxford Economics has currently forecast. Landlords with fixed-rate deals that expire over the next two years are paying rates of around 3.4pc. 

According to Moneyfacts, a data company, the average quoted rates for two-year and five-year fixes are now 6.84pc and 6.78pc. These rates are likely to climb further, although perhaps more slowly if Mr Hunt is able to calm the markets.

Chris Norris of the National Residential Landlords Association, a trade body, said: “Costs are going up at a faster rate than they have in living memory. Landlords’ margins aren’t high enough to absorb the increases that we expect in the next couple of years.” 

Government policy is a further blow. The last time rates were this high, landlords were shielded by tax relief on buy-to-let mortgages, Mr Norris said. Since 2020, this support has been removed.

Gertie Owen, 63, has 45 tenants in houseshares in London and Newcastle. For the first time she increased the rent for sitting tenants by 5.5pc this year. If she takes on new tenants, she will raise the rent by another 10pc, she said. Three of her properties are on fixed-rate deals that are coming to an end. She has been paying 3.4pc but expects to remortgage at 7pc.

Her tenants pay rent that includes bills, which means she also has to shoulder soaring utility costs. The blow has been amplified because Ms Owen can no longer offset all of her interest payments against her tax bill.

Since 2020, the majority of landlords taking out mortgages have done so using a limited company, which means they can still offset their interest payments against their tax bill.

But in 2018 and 2019 the majority were buying as individuals – and it is this group that will be coming to the end of their five-year fixed-rate deals in 2023 and 2024.

DOUBLE WHAMMY FOR LANDLORDS Interest Rate Rises AND Section 24

Until the recent interest rate rises started to bite into cashflow, many larger portfolio landlords had taken the decision to pay the extra tax resulting from the Section 24 restrictions on finance cost relief as opposed to restructuring their business. It might be said that the level of pain they were enduring from Section 24 wasn’t enough, but for many more, IT IS NOW!

There comes a point for everyone when they have to admit to themselves “enough is enough”.

These landlords can no longer bury their heads in the sand. Either they take advantage of the buoyant property market to exit the business altogether or make other radical changes to the ownership structures of their property rental businesses. Either way, they desperately need some good quality tax advice.

If they sell their rental properties now they could be hit with a huge Capital Gains Tax bill. If they change their ownership structure without professional advice the financial consequences could be even more catastrophic. An age old saying is that “if you think professional advice is expensive, wait until you try using an amateur or advise yourself”.

Since the beginning of this year, the Bank of England has increased base rates from 0.1% to 2.25%. This equates to an annual loss of £22,400 of cashflow on every £1,000,000 landlords have borrowed. To make things worse, this additional expense can no longer be offset against rental income. Instead, an additional tax credit of just £4,480 (20% of the increased finance cost) is applied, based on the same example.

Some landlords will not have felt the pinch quite yet, because their mortgage interest rates will be fixed. However, when those fixed rates expire they will find themselves in a new World of pain.

At what point will YOU be saying “enough is enough”?