Rising Interest Rates: What They Mean for Landlords

The Bank of England interest rate has been steadily rising since February of this year. And the latest increase from 1.25% to 1.75%, in August 2022, was the biggest single rise in 27 years.

Add in the highest rate of inflation in 40 years, predictions that this will reach “astronomical levels” by 2023 and warnings of an imminent recession, and it’s clear why the cost-of-living crisis is growing.

Read on to discover why, despite the headlines, landlords have no reason to panic. And learn one simple way to ensure your profits are protected.

How do interest rates affect the property market?

When interest rates rise, landlords on variable mortgage deals will see their monthly payments increase. And for those entering the market, they’ll struggle to find mortgage deals as appealing as they were six months ago.

For example, the recently announced 0.5% rise equates to an extra £500 per year to service a £100,000 mortgage.

A typical NRLA member with two or three properties owes on average £330,000, meaning they’d need to find an extra £1,650 in interest payments each year, if they’re not on a fixed rate. And with mortgage payments generally the largest landlord expense, this will lead to a significant dent in profits.

With inflation also rising, the value of the remaining rental income will be additionally squeezed by the escalating cost of living.

And what about property prices and rental growth? The knock-on effects continue here. Tenants may struggle to afford rents as their monthly outgoings for essentials like energy and food skyrocket. This will slow rental growth and further damage yields.

The vicious circle is completed by economic growth slowing down, further reducing the chances of property price growth.

But here’s the good news

While there’s no denying the landscape is changing and becoming tougher, context is key. Interest rates have been at a historic low since 2008. In the decade before then, rates were consistently between 4-7%. And there were plenty of landlords around making a profit.

So while the current rises may seem dramatic, viewing them from a long-term investment perspective can make them a little easier to swallow.

And for those landlords on a fixed-term mortgage deal, estimated by the NRLA to be in the majority, they won’t see their monthly payment affected at all. 

Indeed, in a recent poll of their members, 86% said that a 0.5% interest rate hike wouldn’t force them to sell. Indications are that the base rate would need to reach 3-5% before triggering drastic action such as putting property up for sale or even leaving the market.

In terms of house prices, unless you’re planning to sell in the very near future, the current climate could also be seen as a positive. If house prices start to slow –  there’s no sign yet – this could provide a window to grow portfolios and find better investment opportunities.

Although that possibility needs to be weighed against the ongoing shortage of stock and growing demand which could keep house prices fairly stable.

What should landlords be doing?

The best advice for now is simple: review and, if necessary, change your current mortgage arrangements and sit tight.

Rates will inevitably increase further so doing all you can to protect your investment is key.

As managing director at MakeUrMove, Alexandra Morris, says: “The recent rate rise should probably be viewed as the sign of things to come. 

“While this particular rise is unlikely to significantly impact landlords, it’s a reminder for all to review current finance deals and mortgage rates. If your rate is coming to an end or you have a tracker, now may be a good time to shop around and switch.”

With concerns about forthcoming changes to legislation also looming large, landlords may also consider converting to limited company status which could bring financial advantages. Although professional advice should also be sought when going down this path.

In conclusion, keep in mind that rates remain historically low, as do the available mortgage products out there. So while we ride out these uncertain times, making sure your finances are running as efficiently as possible will help you to weather the storm.

Keep up to date with the latest changes to legislation on the MakeUrMove blog.