Rents to rocket by 20% as landlords pay higher mortgage costs

Rents to rocket by 20% as landlords pay higher mortgage costs

0:01 AM, 14th December 2022, About 2 years ago 8

Text Size

A grim prediction from the Bank of England is forecasting that rents will rocket by 20% because landlords could be paying up to £4,000 more for their buy to let mortgage in 2023.

The warning comes from the bank’s Financial Policy Committee which says that the monthly repayment facing landlords will rise by £175 – but for a fifth of landlords, the rise could be more than £300.

This rate hike could also see a mass sell-off of rented homes by landlords – pushing house prices down.

The report makes clear that landlords look set to pass on their higher costs to tenants which will see rents rising by around 20%.

Rising mortgage rates are leading to house prices falling

In its report, the committee says that rising mortgage rates are leading to house prices falling after years of substantial growth.

The committee highlights that buy to let mortgage holders are also likely to influence house prices if they decide to sell, but there is some uncertainty about how these prices will react.

There are currently two million BTL mortgages outstanding, which is around 8% of the housing stock.

However, 85% of BTL mortgages are interest-only so there could be a ‘greater proportional impact’ from a rate rise.

Landlords will need to boost their rental income by 20%

The report highlights that landlords will need to boost their rental income by 20% to meet higher mortgage rates and this means that rents will rise as landlords pass on their costs.

Doing so will, the report says, lead to a knock-on effect with renters defaulting on their unsecured credit deals to meet higher rents – and they will then cut their spending sharply which will then ‘amplify the economic downturn’.

The report goes on: “Some landlords might choose to sell properties rather than bear the greater costs of mortgages, and evidence from the Bank’s Agents suggests that a growing number of buy-to-let landlords are choosing to sell properties, due in part to rising borrowing costs.

“If significantly large numbers of buy-to-let mortgagors choose to sell properties, this could place additional downwards pressure on house prices.”

4 million households are facing higher mortgage rates

The bank is also warning that up to 4 million households are facing higher mortgage rates which could see them paying £250 per month more on their mortgage.

That’s when the average monthly mortgage repayment will rise to £1,000 from £750 next year.

The report highlights that half of owner-occupier mortgages could be exposed to increasing interest rates over the next 12 months but banks are expected to offer help to struggling families.

However, because of the pandemic’s rapid rise in house prices, most mortgage holders will escape being dragged into negative equity and households will also face other financial pressures with rising bills until the end of 2023.

Share This Article



12:36 PM, 14th December 2022, About 2 years ago

It's not just the mortgage rates. Other surveys by other organisations e.g. Zoopla have shown that rising rents are driven by new tenancies. Typically landlords don't put rents up by much for existing tenancies.

This is going to be made worse by the proposed EPC changes if they apply to existing tenancies. There's a lot of risk for a landlord in doing significant works whilst a tenant is in a property. So what will happen if EPC changes apply to existing tenancies is that tenants will be evicted in order to get the work done. Then the properties will either be (1) rented out at a higher rent (2) sold to another investor who will rent out at a higher rent or (3) sold to an owner occupier.

If (3) happens then this will increase the problems with supply that are also driving rents up.

This is actually a problem with the tax system and the rent rises are a direct result of government policy.

Peter Webb

13:26 PM, 14th December 2022, About 2 years ago

It's not just higher mortgage interest, but under s24 the higher the mortgage interest the more tax you pay. You couldn't make it up could you

Property One

13:32 PM, 14th December 2022, About 2 years ago

I really don't understand how they have worked out £250 extra mortgage interest.
It is simpler to understand per every £100K of borrowing.
My mortgage rate went up from 2% to 6.5%.
£6.5K interest per £100k borrowing

On my 300k borrowing means £19.5k instead of £6k interest = 13.5k extra.
Per month £1,125 extra per month!


13:34 PM, 14th December 2022, About 2 years ago

That's correct. So if you have a 60-80% BTL mortgage then you own 40-20% of the property and the bank owns the rest. The bank takes no risk and is often your biggest cost; as a landlord you take *all* the risk. So if that cost/risk goes up significantly then you've no option but to raise rents. And the fact that you are unable to deduct the finance costs from your taxes mean that you have to raise rents rapidly to protect your investment.

But it's worse than that because many of the costs that are imposed on you to improve your EPC rating are classed as capital expenditure, not operating expenditure. And there's even more risk if you do the work whilst a tenant is in your property.

So your best option is to evict your tenant do the work and put the property back on the market at a much higher rent. And that's not a situation you created as a landlord; it's tax policy. If you look at the rental increase figures you can see that they are disproportionately affected by new tenancies.

Mark Alexander - Founder of Property118

13:40 PM, 14th December 2022, About 2 years ago

I don’t know where the Government got it’s figures from but the numbers we are seeing from Property118 readers are that their costs have risen by 10’s of £1,000’s a year.

Interest on a £100,000 tracker mortgage has increased by circa £3,740 in the last 12 months and looks set to increase again following the December 15th MPC meeting of the Bank of England.

A portfolio landlord with £2,000,000 of BTL tracker mortgages has already seen mortgage interest costs by £74,800 this year and it’s set to get worse.

If those landlords are not incorporated they can’t even offset these cost increases against their rental income for tax purposes, so they could be losing money in real terms but still have a huge tax bill.


14:02 PM, 14th December 2022, About 2 years ago

Reply to the comment left by Mark Alexander - Founder of Property118 at 14/12/2022 - 13:40
As Mark Alexander points out, this disproportionately affects the majority of smaller investors who have a small portfolio and are not incorporated.

There are lots of those smaller investors including pensioners and public sector workers trying to invest to supplement their public sector pensions. The majority of landlords are small landlords. But in the end the people who pay for those tax policies are tenants.

Hardly a vote-winner is it?

Rent-rises are an effect of government tax policy.

Laura Delow

12:29 PM, 17th December 2022, About 2 years ago

Having watched Mark's video clip this morning, are my maths below correct,
assuming 2023/24 allowances & tax rates/bands:-
An individual owns a £4m Property portfolio value with £1.5m of outstanding mortgages at 5.5% interest, producing £180,000 gross rental Income less £82,500 mortgage interest & £54,000 allowable expenses assuming no major repair or replacement works = £43,500 net rental earnings yet £126,000 is the Declared Taxable Income. The consequences of which are; loss of the £12,570 personal allowance & £860 is taxed at 45% additional rate giving an overall tax liability of £23,889 Income Tax after crediting back 20% relief for finance costs which is equivalent to 54.9% tax paid = £19,611 post tax net rental income. Worse still, if mortgage rates increase to 6.5% = £28,500 Net rental earnings versus £126,000 taxable income = £20,889 Income Tax after crediting back 20% relief for finance costs / equivalent to 73.3% tax paid = £7,611 post tax net rental income. Moving on...if a 5.5% mortgage rate & 60% of the portfolio is an EPC rating of D & E & assuming an average anticipated spend to improve to a C rating is £10,000 per property, most of which will be classed as Capital Expenditure & not Tax Deductible, then the picture is £19,611 post tax profit, less £90,000 EPC improvements (£10,000 per property EPC improvements D/E to a C) = (£70,389) extra finance required if savings not available.
And if fed up of being a landlord, if the portfolio was sold at £4m versus purchase costs of £2m, the chargeable gain is £2m (ignoring sale costs) & even if CGT was charged at the highest income tax rate of 45% = £900,000 CGT (ignoring the annual allowance) = £3.1m net proceeds less £1.5m mortgage debt redeemed = £1.6m net (£1.94m after 28% CGT) invested for example in investment bonds from which 5% pa can be withdrawn tax-free (deemed the return of capital over 20years) = a tax free income of £80,000 pa for 20years & most importantly, no headache. Or to put another way, the yield need only be 1.23%pa to produce the same net income of £19,611pa as per the above example. Even if the net £1.6m proceeds were invested at a 5% yield that was taxable, the tax would only be £19,432 = £60,568pa net of tax versus £19,611 in the above example. Or put another way, £1.6m would only require a gross yield of 1.34% to produce a taxable income of £21,121pa gross = £19,611pa net of tax assuming £1,000 savings allowance.....AND NO HEADACHE.
I must be calculating something wrong surely?

Mark Alexander - Founder of Property118

12:48 PM, 17th December 2022, About 2 years ago

Reply to the comment left by Laura Delow at 17/12/2022 - 12:29
Hi Laura

That's a LOT of number crunching for a Saturday morning.

I have not tried to replicate your number crunching myself yet but the basic principles you have used seem to be broadly correct.

What you also have to bear in mind is that the work required to bring properties up to a band C rating for EPC would be treated improvements, not repairs and renewals, so those costs cannot be offset against rental income. They can, however, be treated as capital costs when the properties are sold. Likewise for the costs of selling, which you have yet to factor in. Furthermore, the landlord would probably have to discount the properties by at least 10% to sell them as tenanted. On the other hand, to sell them with vacant possession would result in the cost of evicting tenants, possible rental void periods and the need to redecorate to achieve the best possible price.

As explained in my videos, incorporating the whole business does improve the scenario for the landlord quite significantly in many circumstances, but not all. That's why quality professional advice from Property118 and Cotswold Barristers is so vital to people in this sort of position.

Leave Comments

In order to post comments you will need to Sign In or Sign Up for a FREE Membership


Don't have an account? Sign Up

Landlord Tax Planning Book Now