Bank of England sounds house price crash warning if landlords sell-up

The Bank of England (BoE) is warning that higher buy to let mortgage rates could see landlords sell up and leave the private rented sector – or push rents up for tenants.

In its latest Financial Stability Report, the BoE says that the average increase in BTL mortgage repayments by the end of 2025 will be £275.

And if landlords absorb the higher mortgage costs without passing a rise onto tenants, then the proportion of mortgages with interest coverage ratio (ICR) below 125% will rocket.

The BoE calculates that at the end of last year, that proportion was around 3% – but by 2025 this would be a staggering 40%.

The Bank makes clear that the rental income will not cover the higher mortgage so landlords will have to hike rents or sell up.

But if they sell up in big numbers, that could lead to a house price crash and put PRS rents up by eye-watering levels.

‘Mortgage costs are putting responsible landlords in an impossible position’

Ben Beadle, the chief executive of the National Residential Landlords’ Association, said: “Growing mortgage costs are putting responsible landlords in an impossible position.

“Either they leave the market at a time when demand for rented housing is already outstripping supply, increase rents, or soak up growing costs which many simply cannot afford.

“Whilst help has been provided for homeowners in the form of the Government’s Mortgage Charter, nothing has been done to support the private rented sector.”

He added: “It is vital that ministers step in to protect the market from the impact of growing costs.

“For renters, housing benefit rates need to be unfrozen without delay to ensure they can cover their rent payments.

“Alongside this, tax hikes on the sector need to be scrapped to boost the supply of homes to rent that tenants desperately need.”

Even worse news for renters in the report

There’s even worse news for renters in the report with the BoE highlighting that national annual rent inflation in the PRS was 5% in May.

But one industry estimate indicates that rents for new lets have seen a 10% price increase in the year to June.

That causes an issue because tenant households tend to have lower incomes than homeowners, relative to housing costs, and have little savings.

The BoE says that renters – around 2.1 million tenants live in a property with a BTL interest mortgage on it – would then be forced to rely on credit and have difficulties in paying that credit off.

‘Landlords are currently subject to a combination of factors’

The BoE report also highlights: “Landlords are currently subject to a combination of factors that are putting pressure on their profitability: higher interest rates and structural changes – including adjustments to income and capital gains tax rules and proposed changes to building energy efficiency regulations and tenancy protection.

“The interest coverage ratio (ICR), which is a measure of rental income relative to interest payments, shows the extent to which a landlord’s rental income covers their cost of borrowing.

“A landlord with high debt-servicing costs relative to their rental income (ie a low ICR) is more likely to experience repayment difficulties.”

The report goes on: “Falling profitability could, in principle, cause landlords to sell their property investments and exit the BTL market.

“If this were to happen in large enough volumes, it could put downward pressure on house prices.”