The Impact of Buy-to-Let Interest Rates on the PRS

Worried about rising buy-to-let interest rates and how they’ll affect your property investments?

On the 23rd of September, the then Chancellor of the Exchequer, Kwasi Kwarteng, unveiled his mini-budget. Leaving aside all comment, the effects of the tax cuts contained in it send the UK economy into a tailspin.

Within days mortgage products were being withdrawn in their thousands, casting serious concerns across the residential and buy-to-let markets. 

At the time of writing, it looks like we can all expect to pay more for our borrowing.

In this blog, we’ll try and sort through all the noise and media coverage and see if we can make some sense of what’s happened in such a short period and how this is likely to affect the private rental sector moving forwards.

What happened?

The mini-budget seems to have created a perfect storm of discontent, both politically and financially. We’ll leave the politics aside, although they do play into what happens as Government U-Turns may result from political considerations*.

Our focus will be on the financial repercussions and how they affect those wanting to invest in the buy-to-let market. To understand that, we need to understand some of the reactions in the market.

In short, by announcing swingeing tax cuts without any suggestion as to how these were to be funded, the Chancellor, at a stroke, undermined market confidence in both the pound and in the broader UK economy.

It was estimated that the proposed changes would create a fiscal hole of around £160 billion, with no suggestion as to how that was to be filled. The new Government gambled, the market looked, scratched its head and decided ‘nope’.

This left the Bank of England (BoE), already struggling with rising inflation staring down the barrel of an emergency interest rate hike, and it was this threat, as much as anything that spooked mortgage lenders.

Some days later, the BoE was forced to buy up billions of pounds worth of Government bonds – in effect Government debt – in order to protect the pensions industry in the UK.

It would be fair to say that it had all gone much worse, much faster than anyone expected. As is typical in such cases, the international markets reacted by dumping UK stocks and the pound to limit their potential risk.

*On the 17th of October, the new Chancellor, Jeremy Hunt, made a statement effectively reversing all of his predecessor’s commitments. The effect of this momentous reversal was to calm the markets, at least temporarily.

Life comes at you fast!

Why did lenders withdraw their products?

This may have been a knee-jerk reaction, but on the whole it was realised that the economy was thundering into unknown territory with the prospects of more rises in the BoE base rate.

This more than anything is what disrupted the mortgage markets. Their lending rates are based on the BoE base rate, along with educated estimations about what changes might occur to those rates in the future.

Suddenly there was a genuine sense that no-one knew what was going to happen tomorrow, never mind months down the line. To lend at current buy-to-let interest rates might cost the mortgage providers dearly, so, like the markets, they covered their backs.

What does all this mean for buy-to-let mortgages?

A quick Google search reveals plenty of available buy-to-let mortgage offers, better still, a chat with your mortgage broker will give you details about what is available and what would suit you best.

That notwithstanding, it is clear that there has been a significant change in the rates available. According to Simply Business, rates are now averaging 6.46%, compared with two to three percent previously.

How is this playing out in the real world?

We spoke to Kessar Salimi, of Freedom Financial ltd.  who shared the following thoughts:

“We had seen buy-to-let interest rates rising steadily over the last few months but after the markets reacted to the government’s mini budget the cost of borrowing increased significantly for lenders which forced many to remove products.

“Some lenders have now reintroduced products but at much higher rates especially on fixed rate mortgages due to volatility just now and into the future.

“Good news is the cost of borrowing is starting to reduce though so we should start to see more lenders returning and variable/tracker/discounted mortgages are starting to look a lot more attractive.

“There is a risk your payments will rise if the base rate goes up or the lender increases their variable rate, however (many) lack early redemption charges allows you to refinance or pay it off without penalty. 

“Another issue just now is lenders’ rental stress tests are having to increase as previously they would stress test between 5-5.5% but with many products now above that, lenders have had to change their criteria.

“This can have an effect on low yielding properties where the rental income may not meet the new stress test (exacerbated by) the current rent freeze not allowing landlords to increase rents mid tenancy.

“I have only experienced one specialist lender (withdraw an offer) but still offered a similar rate (which) was variable rather than fixed.  All the other lenders have honoured any mortgage offers in place.

“I haven’t had any clients not proceed due to the current situation but what we have seen is when clients are refinancing existing properties they are not capital raising as much just now with rates being high.”

That’s a substantial rise in anyone’s books, and landlords are going to have to make hard decisions about how those additional costs are covered. Do they try to absorb the costs, or do/can they pass them on as rent increases?

Advice from the property pros

The not-so-old adage ‘keep calm and carry on’ applies well to the current situation. As illustrated by Kessar’s commentary, the market is alive and reasonably well, but taking a little time to adjust to new realities.

It isn’t harder to obtain buy-to-let finance, but anyone considering doing so should make sure that they’ve done their homework thoroughly before committing to a course of action.

Higher buy-to-let interest rates and increased stress testing may deter those looking for properties or areas with marginal returns, so take extra care in this area.

The private rental sector is too important to the housing needs of the country to simply fold up in the face of recent difficulties, but temporary difficulties, such as the rent freeze in Scotland can further dent the confidence of landlords.

In summary…

There is no doubt that the private rental sector suffered a severe shock following the mini-budget, although it certainly wasn’t alone. This was compounded by fevered press coverage and disappearing buy-to-let products.

Just a few weeks was sufficient to see some degree of sense return, and although buy-to-let interest rates are up, that is a situation which hopefully will change in the coming months.

If you find yourself poised on the edge of a new property journey, and are in need of advice and support, give us a call. We’ll always offer sensible and impartial advice based on our extensive experience in the rental property market.

Written by Chris Wood (MD & Founder) and Ross MacDonald (Director of Sales & Co-founder).

Get in touch on 0333 344 2855 or email us at [email protected]