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How Do Rising Interest Rates and Inflation Affect Landlords?

How Do Rising Interest Rates and Inflation Affect Landlords?

It’s no secret that the UK is in the midst of a cost of living crisis. For landlords, rising inflation and interest rates are squeezing profits left, right and centre, with many traditional buy-to-let investors reducing their asset portfolio, or quitting the market entirely.

Given that landlords are grappling with significantly higher mortgage repayments along with tax relief changes and the threat of tougher incoming legislation, it’s little wonder the latest quarterly NRLA Landlord Confidence Index showed confidence falling to -33.2, with more than 70% of landlords with BTL finance saying things are “challenging.”

But while the golden era of buy-to-let is seemingly well and truly over, that doesn’t mean there aren’t plenty of ways to profit from property. Let’s take a look at the challenges facing landlords and consider where we find ourselves in the current market.

Interest Rates Erode BTL Profits

Ten consecutive base rate rises mean UK interest rates now sit at 4.25% – their highest point since the beginning of the 2005 financial crisis, with the possibility of yet another rate rise just around the corner.

The National Residential Landlords Association (NRLA) also looked in detail at the impact of rising interest rates in its most recent Quarter 3 Consultation, the time which it says landlord confidence plummeted. Almost half of surveyed landlords with a BTL mortgage would become unprofitable if rates hit 5%, which is concerning as many are predicting a further hike when the Bank of England’s monetary policy committee next meets in May. 

If rates do near the 5% mark, many landlords are going to be very worried indeed. The NRLA quotes a worked example showing how mortgage repayments increase by 66% if the rate on an interest-only BTL mortgage rises from 3% to 5%. For many, the cost of repayments alone mean buy-to-let is simply no longer viable. 

Inflation Ramps Up Costs Across the Board

It’s not just mortgage repayments that are giving landlords sleepless nights. With property management, maintenance and repairs making up a significant proportion of landlord expenditure, inflation has meant a deepening struggle just to keep properties up to scratch.

With landlords dealing with constantly rising costs, their cause is not being helped by incoming legislation designed to improve standards in the private rented sector but which ultimately are likely to lead to higher costs. 

Last month, it was reported that the Rental Reform Bill could be launched in a matter of months, with tough new laws on minimum property standards, the abolishment of Section 21 ‘no fault’ evictions, ending rent review clauses, and other significant legislative changes. There are also going to be tough new net zero targets to consider, with the likelihood of many landlords needing to shell out thousands of pounds in the coming years to meet new EPC rating standards.

The Scrapping of Mortgage Interest Relief (MIR)

As if landlords didn’t have it bad enough, the scrapping of Mortgage Interest Relief has made the situation even worse, leading to much higher tax bills and pushing many basic rate payers into higher bands. 

Given all this, many landlords have had no choice but to increase rents, which has also had a big impact on already struggling tenants. With renters facing a soaring cost of living affecting everything from food to energy bills, there’s the increasing likelihood of tenants defaulting on rental payments.

The Future of Buy-to-Let

With more landlords deciding to quit buy-to-let altogether, it’s certainly not helping the UK’s already dire affordable housing crisis. Again, this is compounded by a severe shortage of social housing and long waiting lists with councils up and down the country, putting further pressures on the private rented sector.

Ultimately, it’s unsurprising that many landlords are concluding buy-to-let is simply no longer viable – but that doesn’t mean property is no longer worth investing in. For example, many alternative investments like property portfolios circumvent many of the challenges facing landlords and property owners, including soaring maintenance costs and rising mortgage repayments.

What’s more, looking outside buy-to-let opens up the possibility of investing in lucrative sectors that may otherwise be inaccessible to smaller-scale landlords, such as social housing. If you’re an existing landlord grappling with rising costs, it’s well worth considering your options. 

To discuss property investment in the current climate, please give our friendly team a call on +44 (0)1708 922 222 – or fill in our contact form to request a callback.

Important note: The information provided in this article is general in nature and does not constitute personal financial advice. If you are unsure whether an investment is right for you, please seek professional advice. If you choose to invest, the value of your investment can both rise and fall so you may get back less than you put in.