One in three landlords is struggling to remortgage

One in three landlords struggle to secure a new mortgage after failing their lender’s affordability test.

Some buy-to-let investors are therefore forced to accept variable rates of up to 9.5 percent. Others sell their homes because they can no longer pay their loans.

Mortgage interest rates have risen sharply after the mini-budget of last September. But while homeowner rates have slumped, mortgage interest deductions have remained stubbornly high.

An analysis by broker Mortgages for Business shows that a third of buy-to-let mortgage applications are now rejected.

Those who have been denied a new mortgage can do one of three things. They can switch to their lender’s standard variable rate (SVR), which currently ranges from about 5.5 percent to as high as 9.5 percent.

Alternatively, they can pay a hefty fee to get a more reasonable interest rate, which could cost them tens of thousands of pounds. Or they can sell.

For many landlords, it’s the last straw after years of being squeezed by higher taxes.

Rental brokers and auction houses are reporting an increase in the number of private landlords selling their properties.

Online auction house My Auction says 40 percent of its lots are owner-occupied homes, up from 13 percent this time last year.

Stuart Collar-Brown, of My Auction, says: ‘Interest rate rises have accelerated the exodus of buy-to-let investors.’

Gavin Richardson, CEO of Mortgages for Business, says: “It’s a critical situation. We see that landlords drop from 3.5 percent and can no longer refinance because their loan is no longer affordable according to the lender’s stress test.’

Most landlords will experience a jump in their monthly payments when their deal ends. To determine if the mortgage is affordable, most lenders require the rent collected to cover 145 percent of the mortgage for rent.

So, on a monthly mortgage bill of £1,030, the borrower’s rental income should be £1,500.

Since February 2022, average five-year fixed rates have increased from 3.16 percent to 5.85 percent, according to data company Moneyfacts.

For a landlord with an interest-only mortgage of € 200,000, this is a monthly increase of € 450.

Many landlords are forced to raise rents in response. A survey by lender Landbay found that seven in 10 landlords plan to raise rents if their mortgage payments rise.

Sebastian Murphy, of real estate firm JLM Mortgage Network, says: ‘The only landlords not affected are those who still have a few years left on their current fixed-rate contract. They hope rates will have dropped by the time they need to borrow again.”

Analysis for Money Mail by Mortgages for Business shows just how dire the situation is.

A landlord asking £1,200 rent per month on a £225,000 mortgage at a flat rate of 3.99 per cent would now get a new mortgage of £180,893 based on a 5.49 per cent rate, which is £44,000 less than the loan amount they have to re-mortgage.

At a rate of 5.99 per cent, the shortfall runs even higher at £59,207; at 6.29 per cent it is £67,114.

To be accepted on a £225,000 re-mortgage, the landlord would have to increase the rent they charge by almost £300 to £1,495.

At a time when, according to Rightmove, the median national rent outside London has reached an all-time high of £1,172, estate agents say such a huge increase would cost too much.

Some larger mortgage lenders, such as BM Solutions and The Mortgage Works, often offer borrowers a new deal without asking them to pass another stress test.

This is because although their monthly payment will increase, it is cheaper than transferring the customer to an SVR. But other lenders make landlords reapply as if they were a new customer.

Those that fail the stress tests move on to their lender’s higher SVR and wait for the fixed rate to fall before closing another deal, Murphy says.

“Landlords face huge capital gains taxes when they sell, so instead they pass on some of their higher borrowing costs to tenants,” he adds.

In the past month, a number of lenders have offered a lower-interest option in exchange for a fee of up to 7 percent of the mortgage balance.

For some borrowers, that could mean using cash earmarked for further buy-to-let investments to pay the high fees — or lowering their mortgage balances — to pass the stress test.

“This is the kind of conundrum landlords are facing right now,” explains Murphy.

Vanessa Warwick’s buy-to-let mortgage payments rose from £450 to £1,100 last year. Co-founder of the online landlord forum Property Tribes, Vanessa is currently unable to get a new mortgage from her lender’s SVR of 5.75 percent because she doesn’t charge enough rent to meet loan criteria.

Vanessa, 60, charges her tenants £1,100 a month for a house in Basingstoke, Hampshire.

“When mortgage payments went up, I spoke to my rental agent, who told me the going rate for the area is £1,700,” she says.

“I’ve given the tenants an increase to £1,350, which I think is reasonable,” she adds. “But if they can’t afford it, I’ll have to sell.”

Even if the tenants accept the raise, Vanessa still won’t be able to pass her lender’s checks for a new mortgage, so she’ll have to look for a new deal.

“I’ve been a landlord since 1992 and this is the toughest environment I’ve been through,” she says. ‘It is no longer an attractive investment for new landlords.’

s.partington@dailymail.co.uk