Mortgage market changes – what you can do about them?

Over recent months mortgage lenders have been pulling and repricing buy-to-let mortgage deals as interest rates continue to soar and the global financial crisis continues to take hold here in the UK.

Landlords who already faced a tough market with uncertainty, higher interest rates and changing legislation are finding it increasingly difficult to get mortgages and afford mortgage repayments on their properties.

In this blog we explore the difficulties being faced by landlords now and how landlords could face these problems in order to continue to stay in business and be profitable.

What’s happening with mortgages?

Mortgage rates have continued to rise since the disastrous mini-Budget and in line with the Bank of England base rate consecutive rises. Since the mini-Budget, many fixed rate mortgages have been taken off the market and the mortgage rate overall continues to rise in line with the highest inflation rates for over 41 years.

Why are mortgages going up?

Mortgages continue to rise due to rising inflation. In November 2022, the UK inflation rate hit 10.7%, with October showing an inflation rate high of 11.1%.

To help stabilise the UK economy, the Bank of England changes its base interest rates – raising them to slow down increasing inflation. In December 2022, the Bank of England raised interest rates to 3.5% its ninth increase in a year. This is the highest level of interest rates in 14 years.

This means mortgage rates increased as a result of the base rate increases for those borrowers that are not on fixed rate mortgages, meaning higher repayments and more misery for landlords.

If you have a tracker mortgage, you will have seen repayments increase immediately, whereas if you’re on a fixed-rate mortgage, you will be protected until the end of your current deal. Many banks have now pulled or re-priced their mortgage deals, meaning the deals of the past are long gone and landlords will inevitably face much higher mortgage payments in the future as deals come to an end or if they look to re-mortgage.

Buy-to-let mortgages

There has been a huge change in the buy-to-let mortgage market in the past six months, with deals disappearing and significant price hikes for landlords. However, the UK buy-to-let statistics and market overall, still form a significant part of the mortgage market.

Mortgage industry representatives continue to meet to discuss how the mortgage market is working, and the fallout from Kwasi Kwarteng’s disastrous mini Budget in September.

How the current crisis is affecting landlords

Landlords finishing two or five-year fixed rates mortgages since the mini-Budget in September have been facing interest rates rising from an interest rate of about two per cent to around six per cent.

Many landlords have buy-to-let mortgages on an interest-only basis, meaning they are now faced with monthly payments going up by up to two hundred per cent!

Stress test interest rate increases

A stress test is applied to a mortgage borrower’s application to check the borrower’s ability to repay their mortgage at a given interest rate, even if the actual current rate is lower.

Prior to the mini-Budget, many lenders were carrying out stress tests on landlords at interest rates of 6.75 per cent or seven per cent, but now stress testing is taking place at 8 per cent.

Mortgage brokers are reporting that higher stress tests will make buy-to-let unviable.

In places like London and the South East where yields are low anyway, many landlords are only be able to borrow at 50 per cent loan-to-value (LTV) and landlords who need to borrow more than 50 per cent of a property’s value will find it increasingly difficult.

Loss-making buy-to-let

If you are currently looking at getting into the landlords buy-to-let market now, or you’re a landlord looking to increase the size of your portfolio with borrowing, it is likely that the buy-to-let market will be loss-making for some newer landlords buying now.

The market is seeing many landlords having to increase rents to tenants, just to cover increased mortgage payments, at a time when tenants are struggling with the cost-of-living crisis.

Switching mortgage deals

Landlords are facing issues re-mortgaging their buy-to-let properties unless they do a product transfer with their existing lender. Many landlords are finding their businesses less viable with the current high interest rate environment and tougher landlord legislation, meaning the ability to switch lenders is severely limited.

As bad as the outlook is right now, if could still be worth considering switching mortgage deals now, before interest rates rise even more. But your ability to switch to another lender may be hampered by the new levels of stress testing described above.

Many lenders will allow you to lock in your next mortgage deal before you want the deal to start, so don’t wait until your current deal is up. Our advice would be to begin looking around up to six months before your current deal expires.

UK house prices & mortgage rates

Some landlords are holding off making any big decisions with many experts predicting UK house prices falling as much as 10%-15% in 2023.

If interest rates continue to rise, then many people will simply not be able to afford to take on a mortgage and therefore demand may remain high or increase in the private rental sector.

Tax changes for landlords

Landlords face higher bills from next year after Chancellor Jeremy Hunt slashed the annual threshold for Capital Gains Tax in his Autumn Statement from £12,300 to £6,000 next year and £3,000 from April 2024. This means landlords will have to pay more tax on the profit they make when selling a buy-to-let property.

Other announcements include changing the threshold for the top rate of income tax from £150,000 to £125,000 and freezing allowances and thresholds for income tax, national insurance and inheritance tax until April 2028.

The threshold for income tax (£12,570) will be frozen for a further two years until April 2028. The main National Insurance and inheritance tax thresholds have also been frozen until 2028. This is a stealth tax strategy by the Government that will affect landlords by increasing their tax bills in the coming years.

The Chancellor also announced that stamp duty cuts announced in the mini-Budget in September would remain, but end on 31st March 2025, supporting the housing market by hopefully increasing transactions. Buy-to-let landlords looking to expand their portfolios will still have to pay a three per cent stamp duty surcharge.

Summary

Many landlords are having to make tough decisions about whether to increase rents to break even or sell their properties due to increases in mortgage costs.

Many tenants may find their rents unaffordable and will potentially default on rent payments, affecting landlord profitability and the potential for landlords to lose money.

None of this is good news for buy-to-let landlords. Falling prices means security on loans is reduced, increasing the risk of defaulting on mortgage repayments, and ultimately repossessions.

All of this will undoubtedly have a ripple effect and a significant impact on the rental market in the coming years.

Now is the time to keep track of your landlord finances and seek professional advice from specialist landlord accountants.

Here at dns accountants, we help thousands of landlords manage their finances and have a highly experience team that specialise in the buy-to-let market landlord market.

If you’re struggling in the current market, then contact us today for help and advice by calling our team on 0330 088 6686, or email on enquiry@dnsaccountants.co.uk.

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