A perfect storm is brewing in the rental sector, where increasing mortgage rates, soaring energy bills and the rising cost of living look set to place significant financial pressure on both landlords and their tenants.
Driving this challenge is the increase in buy-to-let (BTL) mortgage rates, which have already jumped from around 2.5% at the start of this year, to upwards of 4.5% currently.
The result of this is significant as landlords with a BTL mortgage of £160,000 coming off a low-rate two-year fixed rate of 2.5%, would see their monthly repayment jump from £333.33 to £600 on a new deal – almost double their monthly repayment amounts.
This hike in mortgage repayment amounts, coupled with agency fees, insurance, annual maintenance bills and voids could lead to some landlords exiting the market, which would create an even greater supply squeeze. This would prove catastrophic given the fact that the supply of private rented housing in England has fallen by almost 260,000 in the past five years, according to official government figures.
This increased financial pressure on landlords will also almost certainly have a knock-on financial effect on tenants too, many of whom are already facing higher rents.
In fact, figures from ONS show that private rental prices paid by tenants in the UK rose by 2.7% in the 12 months to April 2022, figures likely to be exacerbated even further as more landlords exit the market by selling off property of moving to short term rentals due to the fact that they offer better tax benefits.
The rise in rents coupled with escalating living costs is also driving more evictions, with the number of private rental evictions in England increasing by 39% on the previous quarter between April and June 2022, according to official government figures released earlier this month.
Previous government figures also show that a quarter of households – the equivalent of 18,210 households – were found to be either homeless or at risk of becoming homeless because a private tenancy loss in the first three months of the year – an increase of 94% over the year.
This is particularly pertinent given the fact that 64% of private renters have said they would struggle to afford the cost of moving if they were evicted in the current economic climate, according to figures from homeless charity Shelter.
Should landlords be forced to increase rents further to cover the escalating costs of borrowing, the impact of this on tenants could be catastrophic, with those struggling financially being forced to choose between paying their rent or paying their gas and water bill.
Worst still, given the fact that wages in real terms have fallen by 3.1% as a result of inflationary pressures, many tenants may find they can no longer pay their rent or their bills and may be forced to vacate. This would exacerbate the problem even further by outpricing the very people for whom landlords are trying to provide accommodation.
Changes to the interest rate relief from April 2017 means that BTL landlords are no longer allowed to claim tax relief on the interest payments on their BTL mortgages, so higher rates and more properties could actually have a huge impact on their tax liability.
The fact is that landlords are already having to spend thousands of pounds improving their properties to conform to government reforms such as the Energy Performance Certificate regulations requiring all tenancies to have a C-rating or above by 2025 for new tenancies and 2028 for existing tenancies.
The additional financial pressure driven by other market forces could result in many more rental properties being sold because landlords are unable to meet the requirements, a very likely prospect given the fact that 67% of private rented properties in England and Wales were rated below a C less than 12 months ago.
Should this happen, there is a very real risk of further contraction in the rental market, which will drive rents up higher and place even greater pressure on the budgets of tenants.
Hiten Ganatra is MD of Visionary Finance
