The first interest rate rise in a decade on top of recent reforms may have a huge effect on buy-to-let landlords, writes Ellie Duncan
The prospect of an increase in the UK base rate had already raised concerns among buy-to-let landlords before the monetary policy committee (MPC) met on 2 November.
The MPC vote resulted in the UK’s first rate rise in a decade, rising from 0.25 per cent to 0.5 per cent – the level it had been at since March 2009.
There have been plenty of questions about what this might mean for mortgage holders, and particularly buy-to-let (BTL) property owners.
Charles McDowell, Aldermore’s commercial director, mortgages, points out 66 per cent of landlords are reported to have some form of buy-to-let mortgage, meaning it is likely to be the first time many will be subject to a higher mortgage payment.
BTL landlords have faced a number of reforms recently, which many in the industry have suggested may lead to landlords passing on increased costs to tenants.
Those changes have included a stamp duty surcharge of 3 per cent for additional property purchases in April 2016 and a phasing out of income tax relief for BTL landlords from 2020, starting in April this year.
Stricter underwriting guidelines for portfolio landlords were also introduced in September this year by the Prudential Regulation Authority (PRA), taking on its more stringent affordability rules which came into force in January.
Many expected these changes would lead to higher rents but last year’s base rate cut to 0.25 per cent relieved some of this pressure through record low mortgage rates, says John Goodall, chief executive at Landbay.
David Hollingworth, associate director communications at London & Country Mortgages, acknowledges: “The increase in the base rate will clearly affect homeowners but landlords will similarly be eyeing the consequences for them of the first hike in interest rates in a decade.
“Any increase in costs will have an impact on a landlord’s bottom line if they have exposure to variable interest rates, so they will need to run their numbers in light of the increase.”
He continues: “If landlords suffer an increase in cost then there is a chance that it will ultimately be passed on to the tenant.
“That is especially true in a BTL market where landlords have been hit by a raft of change.”
We should remember this rate rise is just putting us back to where we were not that long ago — Charles McDowell
Mr Goodall acknowledges the catalogue of challenges landlords have faced over the past couple of years.
“Yet despite these pressures, there has been little sign of them passing on these costs to tenants in the form of higher rents,” he notes.
“Record low mortgage rates have enabled them to absorb some of the costs, especially those that are wary of tenants facing negative net wage growth, so a base rate rise could make all the difference.”
Pricing in changes
Why might such a slight increase in the base rate have such an impact in the BTL market?
Mr Goodall explains: “A 0.25 per cent uplift might seem small, but the message it would give to the markets, of monetary policy normalisation, could spook landlords, especially those embarking on long-term tenancies.
“In and of itself, a quarter of a per cent is not going to have a huge impact on rental prices overnight, but symbolically it has the power to galvanise landlords to price in many of the tax and regulatory changes that have been building up for some time now.”
Some BTL landlords were preparing for a potential rate rise well ahead of the November meeting, and many of those would have decided to remortgage.
Mr McDowell says: “In 2017 we have seen a shift to buy-to-let remortgages meaning many landlords may have already locked into fixed rates which will give some shelter from the rate increase.
“With that in mind I imagine this rate rise will have encouraged brokers to proactively strike up conversation with their landlord clients, specifically where they can make savings on their current mortgaged buy-to-lets.”
Lower for longer?
Mr Hollingworth points out many landlords will have already reviewed their mortgage and taken advice on what to do ahead of the interest rate hike.
Like Mr McDowell, he has seen strong levels of remortgage activity in the BTL market, partly triggered by the shift to tighter criteria following the PRA requirements.
“Also on the upside is the consistent message from the Bank that further rate rises are unlikely to come thick and fast, so landlords should not see rocketing mortgage costs even where they do have a variable rate,” Mr Hollingworth adds.
One negative side effect of the interest rate increase may come in the form of the stress rates that are applied to BTL mortgages when lenders are assessing affordability, according to Aldermore’s Mr McDowell.
He says: “This may decrease the amount that landlords can borrow against particular properties.
“However, before we become all doom and gloom, we should remember this rate rise is just putting us back to where we were not that long ago and, overall, interest rates remain very low from a historic point of view.”