Interest Rates Central Housing Group

The PRS confronts inflation and interest rates – Originally Posted by NRLA

Interest rates and inflation are squeezing landlords. In many cases landlords are now reducing portfolio holdings or quitting the market altogether – evidence for this comes from the NRLA’s quarterly consultation programme as well as the Landlord Confidence Index.

NRLA membership consultations have increasingly focused on how interest rates and inflation rates are affecting them and their businesses. Landlords have had Mortgage Interest Relief (MIR) phased out, replaced by a tax credit. For many landlords with Buy-to-Let (BTL) mortgages, their business model has become more susceptible to interest rate increases as a result of this tax change.

Understanding how inflation was having an impact on the PRS has also been the recent subject of NRLA research. Inflation-fuelled cost increases are forcing even those landlords who have no debt to raise rents.

These twin foes of inflation and interest rates were front and centre of the NRLA’s 2022, Quarter 3 consultation exercise. This was the quarter in which landlord confidence collapsed – for more details see here. The full quarterly report can be found here.

Impact of rising interest rates

Almost two- thirds of respondents (64%) in the survey have a Buy-to-Let mortgage. Those with BTL mortgages are much more exposed to interest rate rises since the phasing out of Mortgage Interest Rates (MIR). So, it comes as no surprise to see over 70% of landlords with BTL finance finding the impact on their business “challenging”, with a third of these finding it “very” or “extremely” challenging.

The NRLA’s Quarter 4 consultation (report to follow) shows how rising interest rates impact on landlord costs. The report contains a worked example. In that example, mortgage rates rising from 3% to 5% means repayments rising 66% for an interest-only mortgage. At 7%, repayments for the same mortgage rise 133%.

Subsequent research undertaken by the NRLA has established about 85% of member-landlords with BTL finance have most of their long-time finance in the form of interest-only, rather than repayment, mortgages.

“By 7% I would have to add 50% to my rents to make the same profit. However, this would probably make the rooms unlettable. But every prolonged mortgage increase requires a rent rise” HMO landlord.

Interest rates and the strain on the PRS

Many BTL mortgages have an attached condition around rent coverage – so increases in mortgage repayments will result in necessary rent increases. In many instances, higher interest rates will mean landlords having to put rents up ahead of local markets, possibly fuelling rental price inflation – but also creating the risk of landlords renting out property at rent levels which fail to attract tenants.  Meanwhile, interest rate sensitivity is now higher because of the loss of Mortgage Interest Relief.

Landlords were asked about the impact rising interest rates could have on their profitability. At what level of interest rates would their business become unprofitable? 

Chart 1: The link between base rates and landlord profitability

The chart shows that base rates at 5% is something of a tipping point for many landlords. This is the point at which more than half of landlords who have BTL finance would become unprofitable. This equates to about 30% of all landlords who took part in the survey. 

At the time of writing (April 2024) base rates are 4.25% – with many economists expecting interest rates are more likely to move up than come down. If this is the case, the PRS is reliant upon landlords’ fixed term mortgage deals not expiring in the immediate future. 

Inflation and how it affects landlords

The NRLA produce analysis of rental inflation both at a national and at a regional level.  This information with commentary is updated monthly. The quarterly consultation programme now gives more prominence to capturing changing levels of concern landlords have about inflation and its effects. 

In the Quarter 3 consultation, landlords were asked specific questions about inflation. In this survey, across all landlords, over 90% had at least some concerns about the impact of inflation on their business. Almost 40% (39%) of landlords were either “Moderately” or “Extremely” concerned. 

When landlords are divided into those who do and those who don’t have BTL finance, a clear picture emerges:

  • Among landlords with BTL finance, 30% were “Moderately” or “Extremely” concerned about inflation. 
  • However, among those landlords WITH a Buy-to-Let mortgage 70% expressed this level of concern.

Landlords were asked to identify how inflation was affecting their business:

Chart 2: How landlords suffer from inflation

The chart above shows how landlords feel the effects of inflation.

  • Just 2% of landlords stated inflation was having no impact on their property business at all.

By far and away the most common impact of inflation is being felt in the rising costs of property maintenance.

  • Four-out-of-five (80%) of landlords identified this as a key cost. This factor is a long way ahead of other concerns.
  • This is confirmed by the Landlord Confidence Index (LCI) research – property management is the number one “landlord cost” identified by landlords. Landlord costs regularly feature as a key driver underpinning landlords’ portfolio and rent decisions. See the LCI corresponding to this research piece.  

Landlords are also affected by other consequences of inflation:

Almost 40% of landlords (37%) observed that they have had to increase rent more than they would like.
A similar proportion (34%) also identified an increase in struggling tenants – placing added pressure on landlords. 

Summary

The phasing out of MIR has left landlords more exposed to the twin shocks of interest rate increases and inflation which, by the second half of 2022 had placed a stranglehold around the economy.

Inflation is hitting all landlord businesses – only 2% of landlords feel inflation is not having an impact on them. Rising costs and struggling tenants means landlords are literally feeling a pinch in their business operations. 

Landlords with BTL mortgages find themselves exposed to the main weapon with which UK policymakers combat inflation – interest rates. For many landlords, the threat of interest rates returning to a level at which their mortgage payments cannot be met, is increasing. The terms and conditions on many BTL mortgages – rental income as a multiple of the repayment – will mean rents are forced up.

The abolition of MIR for landlords means the UK – in making landlords more price-sensitive to interest rate changes – is choosing a policy action which reduces rental supply still further. 

Blog Post from NRLA

See details of our Guaranteed Rent Scheme here

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