Rising mortgage rates hit landlords hard and could trigger a sell-off

Landlords are now paying £15bn in mortgage interest every year as their cheap buy to let mortgage deals end – and the rate rises could see BTL investors sell up, research reveals.

According to Hamptons, that mortgage interest amount is 40% higher than it was a year ago – and 58% higher than November 2021.

The research also reveals that the number of BTL mortgages has been declining since November 2022, as landlords have either reduced their debt or sold their properties.

However, the total value of all mortgages has remained stable over the same period, indicating that new investors are buying at higher prices and interest rates.

Interest rates have squeezed investors

The head of research at Hamptons, Aneisha Beveridge, said: “With mortgage interest often landlords’ largest cost, the pace at which rates have risen has squeezed investors.

“Even if there are no further rate hikes by the Bank of England, we could see the amount of mortgage interest paid by landlords exceed £20bn over the next two years.

“This has the potential to eat up just over half the amount mortgaged landlords receive in rent.”

She added: “For some investors, this will be unaffordable, and they will likely bow out, keeping upward pressure on rents.”

Long-term decline in borrowing costs

The rise in mortgage costs follows a long-term decline in borrowing costs that started in 2015 and ended in 2021.

Between March 2015 and November 2021, the total amount of mortgage debt held by landlords increased by 43%, but the total amount of mortgage interest paid decreased by 3%, driven by falling interest rates.

The report also shows that most of the borrowing by landlords was not used to buy more properties, as the number of rented homes only increased by 4% over the same period.

However, mortgage costs for landlords look set to continue rising – even if interest rates stay close to where they are today.

Hamptons says that the average mortgage rate on outstanding landlord debt was 3.4% in August but if this rate reaches 4.0%, landlords will pay £17.9bn in mortgage interest annually.

If it reaches 5%, they will pay £22.4bn, and if it reaches 6%, they will pay £26.8bn.

‘Rising house prices encouraged many landlords to remortgage’

Ms Beveridge said: “A decade of cheap money and rising house prices encouraged many landlords to remortgage and extract cash out of their buy to let when remortgaging.

“Our analysis suggests that most of this money wasn’t reinvested back into buying rental homes and was invested elsewhere or used to help their children buy their first home.”

She adds: “Rising rates will reverse this flow of finance, pulling cash out of the economy and back into the housing market as investors look to pay down their debt instead.”

More landlords face higher mortgage rate

The research also predicts that as more landlords face higher mortgage rates, the proportion of rental income being used to pay mortgage interest will keep rising.

The firm says that at an average outstanding rate of 4%, around 43% of rental income paid to mortgaged landlords will go towards mortgage interest, rising to 54% at 5% rates and nearly two-thirds (64%) at 6% rates.

Hamptons also says that rents continued rising in September with a let costing 11.7% more than the same month last year.

This is the second highest increase on record, only behind August’s figure of 12%. The average rent now stands at £1,325, up from £1,186 in September 2022.

Rents are rising faster in London

However, rents are rising faster in London than anywhere else with the average cost of renting a property being £322 or 15.7% more expensive than it was a year ago.

Both Inner and Outer London recorded double-digit rental growth, but rents in Outer London (16.2%) rose faster than anywhere else in the country.

The average Outer London rent last month (£2,241) was higher than the average Inner London rent two years ago in September 2021 (£2,186pcm).

Rents are rising at a double-digit pace in most regions, except for Wales and Northern Ireland.

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