Stay calm, plea to landlords as buy-to-let loan deals disappear

Landlords are being warned to brace for a rise in mortgage rates that will force many to sell – or cause financial woes for their tenants with rent increases.

The increases could stifle hundreds of thousands of landlords who invest in owner-occupied homes for an income in old age.

More than 1,000 mortgage deals were pulled from the market last week, according to rate controller Moneyfacts. Of the approximately 850 buy-to-let deals still available, landlords are now required to pay an average mortgage rate of 5.26 percent on a five-year fixed-rate agreement. A month ago, such a deal averaged 3.25 percent.

On a £300,000 mortgage, this can add up to an extra £500 in monthly payments. Mortgage rates have been raised after the Bank of England raised the base rate to keep inflation under control.

Last December, the base interest rate was only 0.1 percent, but now it is 2.25 percent. Financial markets predict that this could rise to six percent by the spring.

The National Association of Landlords believes that this is not the time to panic. The Director of Policy and Campaigns, Chris Norris, says: ‘Keep calm. No one knows for sure what will happen, but take this opportunity to think about your future plans.

“Those with three months or less left on a fixed-income deal can start looking around now, as lenders can sign up new landlords for a future deal that starts in a few months.”

Buy-to-let mortgage rates tend to be higher because they carry a higher risk.

About 90 percent of rental-to-rental loans are interest-only, where you pay back the interest expense on your loan and not the original borrowed capital.

Moneyfacts points out that while the average mortgage deals are over 5 percent, there are still some competing deals — though more are being withdrawn every day.

One of the best buys right now is a 4.39 percent fixed rate offer of 4.39 percent for two years from NatWest for a loan worth up to 60 percent with no arrangement fees.

For a fixed five-year deal, NatWest is again offering a rate of 3.89 per cent for a loan of up to 60 per cent against value and a settlement sense of £995.

Meanwhile, TSB offers a two-year tracker buy-to-let mortgage that charges 1.89 percentage points above the base rate for a 60 percent value loan, also with a £995 settlement fee.

Lee Grandin, owner of buy-tolet broker Landlord Mortgages, agrees now is not the time to panic.

He says: ‘Remember that in big cities, such as London, there is still a shortage of rental housing for people. So if mortgage rates go up, you may want to consider raising the rent instead of just selling.’

However, not all landlords will be able to pass on rate increases, as tenants also face rising costs and may be unable to pay more. “Landlords should remember that they have been spoiled for years with low rates,” Grandin adds.

Another major concern for owner-occupiers is the risk of a housing crash – fueled in part by landlords and homeowners who are forced to sell because they can no longer pay their mortgage and other bills.

House prices for the 12 months to July were up 15.5 per cent and averaged £292,000, the Office for National Statistics says.

Many fear that this level of growth is unsustainable and could end in a crash – commentators have predicted that house prices will fall by 10 to 20 percent in the coming 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 can be left out of pocket.

Landlords are already feeling the crunch with a slew of tough new measures being taken to improve safety and environmental standards.

This started last year with new electrical safety regulations requiring an electrical installation condition report (EICR) to be completed every five years – checking wiring and sockets.

Such certificates can cost £1,000 as electricians have to go through the whole house to give it a clean bill of health. If rewiring is required, repairs can cost thousands of pounds.

There will also be a new energy performance certificate (EPC) legislation, which means that rental properties must have at least an EPC of ‘C’ from 2025. Today, only four out of ten homes achieve this required level.

This is because older properties – many of which are rented out – generally lack well-insulated walls or roofs and have drafty windows. The cost of rectifying many Victorian properties can be tens of thousands of pounds.

There is also concern that an expected Renter’s Reform Bill, due as early as next year, could remove a “section 21” clause on no-fault evictions.

This means that even if a landlord has a good reason for asking a tenant to leave — such as not paying rent — they may face the potentially costly process of taking the case to court.