The transition to higher interest rates has hit landlords hard. Nearly 70% of investors across the UK are reliant on mortgage finance to fund their buy-to-let, with the vast majority on interest only deals. As these investors roll off cheaper rates, the total amount they’re paying in mortgage interest is surging.
Investors across the United Kingdom are now collectively paying £15.0bn in mortgage interest on an annual basis. This figure has increased 40% (or £4.3bn) over the last 12 months and 58% (£5.5bn) since it bottomed out in November 2021.
This rise not only reflects the expiration of fixed-term deals, but also tracker rates increasing and new investors buying at higher mortgage rates. The increase in the total mortgage interest bill also comes despite the number of outstanding buy-to-let mortgages has been falling since November 2022 as investors have either paid down debt or sold up. However, the total value of existing mortgages has remained broadly flat over the same period due to house price inflation and cheaper, more highly leveraged homes being sold off.
More to come
As landlord’s low-rate deals continue to expire, this £15.0bn figure is likely to continue rising over the coming months and years, even if mortgage rates remain close to where they are today.
The average mortgage rate on outstanding landlord debt stood at 3.4% in August. However, if this rate hits 4.0%, landlord’s total annual mortgage interest bill will reach £17.9bn. At average rates of 5.0%, it will hit £22.4bn and at 6.0% rates, £26.8bn.
The bigger picture
The increase in the annual mortgage interest bill follows a long-term decline in borrowing costs which began in 2015 and concluded in 2021 when the Bank of England began their rate hiking cycle. Between March 2015 and November 2021, the total amount of mortgage debt held by landlords rose by 43%. However, the total amount of mortgage interest paid fell by 3% over the same period, driven down by falling interest rates.
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 given the total number or rental homes rose just 4% over the same period.
Instead, the cash was likely invested elsewhere or used to help their children buy their first home. However, higher 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.
Counting the cost
Overall, mortgage interest accounted for around 26% of all rental income in the UK, up from a low of 17% in January 2022. However, this figure includes rental income from landlords who do not have a mortgage. The average mortgaged landlord paid 37% of their rent on mortgage interest in August, up from a low of 24% in November 2021.
As more landlords face higher mortgage rates, the proportion of rental income being used to pay mortgage interest will continue to rise. At an average outstanding rate of 4.0% around 43% of rental income paid to mortgaged landlords will be spent paying mortgage interest, rising to 54% at 5.0% rates and nearly two-thirds (64%) at 6.0% rates.
Offsetting the pain
Annual rental growth across Great Britain remained in double-digits during September, with the average cost of a new let up 11.7% on the same period 12 months ago. This is the second fastest increase on record, surpassed only by August’s figure of 12.0%. The average rent in Great Britain now stands at £1,325pcm, up from £1,186 in September 2022.
Rents are rising faster in London than anywhere else. The average cost of renting a property in the capital was £322 pcm or 15.7% more expensive than it was at the same time last year. 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 (£2,241pcm) was higher than the average Inner London rent two years ago in September 2021 (£2,186pcm).
Nationally, rents are rising at a double-digit pace in most regions. However, the rate of growth slowed slightly from last month, with rental growth in the fastest-rising regions dipping. Southern England and Scotland bucked this trend, with rental growth continuing to accelerate from an already high level.
However, while these rent rises will help offset some of the increase in landlords’ mortgage payments, it’s unlikely to cover the full cost. As mortgage rates continue their gradual decline, landlords whose deals are expiring today are likely to feel less pain than those who had to remortgage over the summer.
