The cost of mortgage payments have surged by 283% since 2021 for landlords using interest-only, highlighting the dramatic effects of rising interest rates, Octane Capital research shows.
Buy-to-let mortgage rates have soared from an average of just 1.65% in October 2021 to 5.72% in October 2023. As a result landlords making interest-only payments on their mortgage have seen costs climb from £272 per month to £1,042.
Jonathan Samuels, chief executive of Octane Capital, said “it’s been a challenging year for the nation’s landlords, as mortgage repayments have dramatically eaten into their profit margins, margins that have already been reduced due to a string of legislative changes from the government in recent years. Those who opt to pay an interest only payment have seen a particularly large jump in the monthly cost of their mortgage and so it’s no wonder many landlords are dubious about their future in the sector and the profitability of their portfolio. One positive is that buy-to-let rates now seem to be on the slide, after increasing rapidly between 2021 and 2022. With the Bank of England holding the base rate since August, it seems that trend could continue as we move into 2024.”
Landlords paying off capital as well as the interest are now paying £1,371 per month, an increase of 71% versus October 2021, when they paid £804.
One silver lining for mortgage holders is the cost of two-year fixed rates have started coming down again, as they fell slightly from 5.87% to 5.72% between October 2022 and October 2023.
Higher mortgage payments haven’t finished filtering through to rents
Almost two thirds of private landlords expect to see their mortgage payments increase over the next 12 months – suggesting that further rent increases are on the horizon. Over a quarter of landlords said they plan to remortgage over the next 12 months, with 60% expecting their mortgage repayments to go up.
Landlord investors across the UK are now paying £15 billion in mortgage interest on an annual basis, up 40% over the course of the last year. Ben Beadle, chief executive of the National Residential Landlords Association, said “higher interest rates put continued pressure on renters, as landlords are simply unable to afford growing mortgage costs. Ministers need to accept that tax hikes on the sector have also played a major role in the affordability challenges we now see across the rental market. It’s time to reverse course and develop pro-growth tax measures. Without them it is renters who will continue to struggle as demand outstrips supply and rents go up.”
The buy-to-let market is especially exposed to the impact of higher interest rates, given 82% of mortgages in the sector are interest-only according to the Bank of England. This is compared to just 11% for owner-occupier mortgages. As a result, the Bank warns that, in the near term, “higher rents are likely, given rising mortgage costs and strong demand.”
Despite higher rents, Savills finds that landlords’ profits are at their lowest level since 2007. Rising rents largely reflect the need for landlords to cover the increased costs which they continue to face.
Landlords focusing on HMOs
An increased number of brokers are searching for HMO mortgage products, reflecting that more landlords are taking on this investment type in search of higher returns. Searches for these products increased by 20% in November, research from Legal & Geral Ignite found.
The number looking for a ‘second residential property’ also increased by 29%.
Kevin Roberts, managing director, Legal & General Mortgage Services, said “the data… highlights the resilience of the overall mortgage market, with diverse trends among portfolio landlords and a sustained interest in capital raising, even during these uncertain times.”
Google searches for mortgages that allow a gifted deposit have risen by 10% – suggesting that more first-time buyers are being given a helping hand, data from Legal & General Ignite has revealed.
In November there was a 9% month-on-month increase in searches for first-time buyer products, suggesting there is renewed appetite to get on the housing ladder, despite the difficult economic conditions.
Roberts added “as the property market continues to evolve, it’s clear that first-time buyers are driving significant momentum, seeking support from the Bank of Family to navigate affordability challenges. Affordability does remain a persistent concern though, reflected in the notable level of defaults and missed mortgage payments, as well as the continued reliance of first-time buyers on the support of family and friends.”