United Kingdom

How will February’s interest rate hike affect the PRS?

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The Bank of England emblem at the front of a building

The Bank of England has raised interest rates to 4%, causing knock-on effects for the private rented sector and the economy as a whole.

The rising cost of borrowing will make it more expensive for landlords to purchase new properties or renew mortgages on their existing ones. It will also make it more difficult for landlords and agents to borrow to invest in their businesses – for example, when landlords need to make renovations.

Rising interest rates will also slow down an already weak economy, putting greater pressure on landlords’ and tenants’ finances. A study by bridging loan broker Finbri found that over half of landlords plan to increase rent to cover the increased cost of borrowing, but rent increases could be limited by tenant affordability.

If landlords can’t achieve higher rents, they may exit the market instead. In their Monetary Policy Report, the Bank noted that supply in the private rented sector is falling short of demand with more landlords quitting. Analysts pointed to a range of factors, including tougher regulation and higher mortgage costs – the same ones that private rented sector industry bodies have repeatedly warned the government about.

Silver linings

But it isn't all bad news. The Bank forecasts that inflation has now peaked and that this year’s probable recession will be shorter and less serious than previously feared. Figures released by the Office for National Statistics also showed that the UK just about avoided recession in 2022, performing better than expected. If the pressure on tenants’ finances eases, arrears will be less of a threat.

And while the Bank is still expected to raise the interest rate further this year, analysts now expect it to peak at 4.5% this summer. As buy-to-let mortgages are usually interest-only, landlords’ mortgage payments can vary a lot with interest rates – meaning that the 6% interest rates predicted last year could have caused serious issues for many investors.

In truth, despite the increasing base rate, mortgage interest rates are trending down. Interest rates peaked after the mini-budget last September. Even so, anyone who last fixed their rate before 2022 will see their mortgage payments increase sharply when they come to renew. In 2021, the average interest rate on a buy-to-let mortgage sat at around 3%. At present, investors are unlikely to get a rate below 4%, and could pay closer to 5% for larger loan-to-value ratios or longer fixes – meaning that landlords renewing now after a two-year fix will see their interest repayments rise by a third or more.

Other finance headlines

NRLA calls for landlord tax review to tackle private rent “supply crisis” – Mortgage Strategy

Repossession figures trigger worried response from charity – Letting Agent Today

Why a mortgage market price war is good news for homeowners – Metro

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