Homeownership has varied vastly in the last century. There have been periods of time where either renting or owning a home has been more common. Up until the 1960s renting a property was more common among most people, then up until the mid-1990s the private rental market decreased, and social hosing became more common. The 1980s also saw the start of a boom in home ownership. This was due to rising incomes and the increased availability of building society mortgages, as well as policies aimed to increase home ownership such as the right to buy program since 1980. After the UK’s home ownership rates peaked around 2003, private renting has since been steadily increasing. Currently, only about 41% of those aged 25 to 34 own their homes.
For those who have the means to own a home, it is something that they have worked hard to do people cut back on many luxuries in order do so, especially in recent years. Whereas only a select number of people can invest in buy to let properties. Buy to let mortgages are taken out with the intention that the person who owns the property will rent it out as a private landlord to generate an income for themselves. It is unlikely that those who do not already own a property would be able to invest in a buy to let property due to the high percentage deposit which mortgage companies require to be put down at time of purchase, this tends to be a minimum of 25%.
Buy to let mortgages are different to traditional mortgages as the mortgage terms are on an interest only basis, meaning that you do not have to pay off the capital and you will be required to pay the full loan at the end of the mortgage term. It tends to be limited companies and individuals who take out buy to let mortgages. For limited companies, the interest rates on their properties tend to be higher than individuals.
Lately, there has been an increase on mortgage interest rates, and this has brought up the question of ‘are buy to let properties still profitable for landlords?’. Interest rates are currently 2.25% and another rate announcement is due 3 November. For those on a tracker, standard variable rate (SVR) or variable mortgage, their payments will immediately go up if the base rate goes up. For landlords, if the payments they are making go up, they profit they are making from the rent their tenants pay them will decrease, making the property less profitable for them and so raising the question of if it is worth having a rental property after all.
As the bank of England interest rate rises from 3 November, landlords will need to consider the higher cost of mortgage repayments and so may potentially have to increase the rent that they charge their tenants. Also, those who are looking for a new mortgage deals are likely to have a much higher interest rate when the deal they are currently on runs out.
There is also a possibility that tenants may start to notice a lower standard of living in the properties they are renting as landlords could be less willing to spend copious amounts on property upkeep. A potential risk of the interest rates is also that a lack of investment in and demand for properties could result in downward pressure on house prices, so landlords who hope to sell in the future could lose out on capital gains.
What do landlords say?
The situation is different for all landlords, one said “My buy to let mortgage fortunately was fixed last year for 5 years, whilst interest rates were low. I’ve fixed the rate since taking out the mortgage as a result of suffering the rapid interest rate rise on my main property at the end of the 1980s”. This shows that not all landlords are being devastated due to rising interest rates, as those who have fixed their rates whilst interest rates were low are now in a better position than they would have been had they not taken those actions.
Individuals also learning from past experiences equips them to make smarter decisions as this landlord has. They also said, “when I first started letting the property there were more deductible expenses but over the years HMRC have removed most of these and its less beneficial to let a property if you have a large loan against it but having held the property for a number of years, with rents having risen and overpaying the mortgage the property provides a healthy income and tax bill”. This landlord seems to be benefiting from their buy to let property, yet they have clearly explained how for other landlords this may not be the case. HMRC removing expenses that you can claim against the property means that being a landlord is more expensive than it used to be and if landlords have not taken certain measures they will not benefit as much from having a rental property as you could be led to believe.
With times being so unprecedented, it is advised that landlords or prospective landlords get in touch with a mortgage broker. Professional advice is a wise choice when you feel uncertain about any choices you are making, being as informed as you possibly can will equip you to be able to deal with situations to the best ability you can.
What does a mortgage advisor think?
Mortgage advisor Russell Maggs, said that whether or not it is worth the money for people to invest in buy to let properties with interest rates rising depends on if they are investing in property for cash flow, or for the value of the property going up over time. If they are investing for cash flow, that is a problem at the moment.
Russell said “currently there will be a lot of landlords whose rent won’t cover their mortgages” meaning that ultimately landlords will end up out of pocket from their buy to let properties. Russell stated how, if landlords are investing in property for the value of the property to go up over time, they will be in a good position in a few years’ time as if you keep a property for 20-30 years, its is almost guaranteed that the value of the property will have increased by the time that the owner decides to sell up. Russell talked how the Mini Budget announced by the government caused the rate of borrowing to raise 2-2.5% which has been an issue.
When clients come to him at the moment asking if they should buy a home now, or in a few months’ time based on interest rates he isn’t able to give them a definitive answer. “I don’t have a mystic ball, I can only tell people what deals are available today”, not even mortgage advisors are able to say when a sensible time is to invest in property as it is not certain if interest will be better or worse than they are now compared to in 2 or 3 months’ time.
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