While the government has pledged to help homeowners struggling with their borrowing, offering similar assistance to landlords with buy-to-let mortgages could help protect thousands of tenants.
There are around 1.3 million landlords with fixed rate buy-to-let mortgages currently outstanding in the UK, along with around 290,000 with tracker mortgages and 360,000 on their lender’s standard variable rate, according to UK Finance data.
This makes up a large portion of all outstanding mortgage debt across the UK, and with interest rates taking another upwards surge last week from 4.5% to 5%, many people with mortgages may be looking at rising costs either immediately or in the future.
However, as Angus Stewart, chief executive of online brokerage Property Master, recently pointed out, while the government has announced measures to take the pressure off borrowers in the mainstream mortgage market, those with buy-to-let mortgages have not been offered the same help – and this could impact tenants.
Help for landlords is needed
While the UK housing market has remained robust through much of the turbulence of recent years, the latest rise in interest rates is likely to have the biggest effect on owners. In the rental market, tenant demand remains sky-high, pushing up rents, but the environment is more difficult for landlords and homeowners alike.
Particularly since landlords are no longer allowed to claim the same level of mortgage interest tax relief as they did in the past, some of the rising costs of their buy-to-let mortgages will inevitably need to be passed onto tenants.
Stewart says: “The continued increase in interest rates is causing a perfect storm. George Osborne’s changes to the rules on interest rate relief in 2015 had minimal impact when interest rates were low However, they are now seriously impacting the profitability of a landlord’s business.
“Coupled with much tougher affordability rules means that many landlords cannot remortgage at current rent levels leaving them on the lender’s SVR some of which are approaching 10 per cent. They are mortgage prisoners, and the logical option is to sell or substantially increase rent.”
As Stewart points out, helping homeowners with their mortgages is a positive step, but the government mustn’t “ignore landlords which are a key source of housing with five million households”.
Interest-only buy-to-let mortgages
Due to the nature of property investment, many landlords opt for interest-only buy-to-let mortgages. This is because the property itself serves as the endowment, and any outstanding mortgage balance will be paid off upon the ultimate sale of the property – normally with a profit.
According to Ben Beadle, chief executive of the National Residential Landlords Association, in fact around 85% of buy-to-let mortgages are interest-only, and this means they could be the hardest hit by rising mortgage rates, adding that this will add further pressures to both renters and landlords.
He says: “It makes no sense to have a tax system that discourages investment in the homes renters need, and benefit payments that fail to provide vulnerable tenants with the assurance that they can afford their rents.
“The Chancellor needs to take urgent action to support the rental market by reintroducing mortgage interest relief in full and unfreezing housing benefit rates.”
The measures Chancellor Jeremy Hunt announced last week to help homeowners included giving everyone the option to call their lender and ask for support, or switch to interest-only temporarily before witching back, without facing a new affordability check or affecting their credit score.
Customers who are up-to-date with their payments should also be able to switch to a new deal at the end of their fixed rate without a new affordability check, and they will also not be forced to have their homes repossessed within 12 months from their first missed payment.