United Kingdom

Are interest rate rises a crisis or opportunity for the PRS?

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What do spiralling mortgage costs mean for the private rented sector?

Mortgage lenders have passed on the Bank of England’s recent interest rate rises to borrowers, pushing up costs for anyone taking on new debt in the last few months. Average interest rates on 2-year and 5-year fixed rate mortgages are now over 6%

Costs still have further to climb. Analysts expect the Bank of England to go for an extra-large interest rate hike on 3 November, taking it over 3% for the first time since 2008. Commercial lenders will already have priced in the expected rises to some extent, but mortgage rates are likely to climb higher still if rates keep rising next year. Market watchers now expect them to peak at 5.25% in 2023, although the Bank's Deputy Governor Ben Broadbent has said that they may not have to go that far. Unless house prices fall to compensate, landlords will find it less and less affordable to invest in new properties.

Once rates go up, they’re likely to stay up. Interest rates have been at historic lows since the 2008 financial crisis. According to Mervyn King, former head of the Bank of England, the current rises are just an overdue return to normal.

How will the PRS adapt to high interest rates?

The longer interest rates stay high, the more borrowers will face big cost increases as their fixed terms run out. This could have huge consequences for landlords and tenants because of the way buy-to-let mortgages work. BTL mortgage affordability calculations are usually based on the Interest Coverage Ratio, which is the ratio of rental income to mortgage interest repayments. Credit rating agency Moody’s predicts that, if interest rates stay high, 30% of buy-to-let landlords could fail their affordability checks when it’s time to remortgage – meaning that they may have to increase rents sharply just to qualify.

But the ongoing shortage of homes for rent means that landlords who need to increase rents can get away with doing so. Many potential first-time buyers are now priced out of purchasing a home and will have to continue renting, increasing demand for rented properties further. The minority of landlords who own their properties outright could also enjoy higher market rents without paying higher mortgage costs. 

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