Interest Rates Go Up Once More. How Does This Latest Hike Affect Landlords.

The Bank of England has raised the interest rate by a half point to 5% on 22 June 2023, the highest level since 2008. This is the 13th consecutive increase since December 2021, as the central bank tries to curb inflation and stabilise the economy.

But what does this mean for landlords and their tenants? In this blog post, we will summarise the recent changes and break down their implications for the private rented sector.

The impact of higher interest rates on landlords

Higher interest rates mean higher mortgage costs for most landlords, unless they have fixed-rate deals. According to Savills, landlords are making their lowest profits for 16 years as interest rates rise, with net profits falling below 4%. This puts pressure on their income and cash flow, especially if they have high levels of borrowing or multiple properties.

Some landlords may decide to sell up and exit the sector, particularly those who are near or at retirement age. Savills estimates that 3.8 million properties are owned by landlords aged over 55. If they choose to leave, this could reduce the supply of rental homes and increase competition among tenants.

Other landlords may try to pass on some of the increased costs to their tenants by raising rents. However, this may not be easy or feasible in some areas where demand is low or tenants are struggling with their own finances. Landlords also need to follow certain rules and procedures when increasing rents, such as giving written notice and ensuring the rise is fair and realistic.

Alternatively, some landlords may look to remortgage their properties and switch to cheaper or longer-term deals. However, this may not be possible for some landlords who do not meet the stricter affordability criteria imposed by lenders in recent years. According to Landbay, a buy-to-let expert, forecast rises in interest rates could force landlords to raise rents to meet mortgage affordability criteria, or risk being trapped on higher rates.

The impact of higher interest rates on tenants

Higher interest rates also affect tenants in various ways. Firstly, they may face higher rents if their landlords decide to increase them to cover their mortgage costs. This could make renting more unaffordable for many tenants who are already facing rising living costs and stagnant wages.

Secondly, they may have less choice and security if their landlords decide to sell up and leave the sector. This could force them to move out and look for another home, which could be stressful and costly. They may also face more competition and higher rents from other tenants who are in the same situation.

Thirdly, they may find it harder to buy their own home if they want to. Higher interest rates mean higher mortgage costs and deposit requirements for potential buyers, which could make homeownership more inaccessible for many renters.

What landlords should expect in the future

The future of interest rates is uncertain and depends on various factors such as inflation, economic growth, consumer spending and global events. However, many experts predict that interest rates will continue to rise gradually over the next few years, as the Bank of England tries to keep inflation under control and support the economic recovery.

This means that landlords should prepare for further increases in their mortgage costs and plan ahead for different scenarios. They should also keep an eye on the market conditions and demand in their area, and adjust their rents accordingly.

Landlords should also be aware of other changes that may affect them in 2023, such as new rules that will offer tenants better protection against eviction and rent rises under the Renters’ Reform Bill, and a cut in the capital gains tax allowance for sellers from £12,300 to £6,000 from April.

Landlords who want to stay in the sector and maximise their returns should consider diversifying their portfolio, improving their properties, offering longer-term tenancies and seeking professional advice from a qualified accountant or financial adviser.

Click here to read our dedicated blog breaking down the renters reform bill in detail

How inflation continues to affect interest rates

One of the main reasons why the Bank of England has been raising interest rates is to reduce inflation, which is the rate at which prices of goods and services increase over time. Inflation erodes the value of money and reduces people’s purchasing power.

The Bank of England has a target of keeping inflation at 2% per year, but in recent months inflation has soared above this level due to various factors such as supply chain disruptions, labour shortages, higher energy costs and increased consumer spending.

If inflation remains high for longer than expected, the Bank of England may have to raise interest rates further and faster to bring it down. This would mean higher mortgage costs for landlords and potentially lower demand for rental properties.

On the other hand, if inflation falls faster than expected, the Bank of England may have to lower interest rates or keep them unchanged to support the economy and avoid deflation, which is a sustained fall in prices. This would mean lower mortgage costs for landlords and potentially higher demand for rental properties.

However, it is important to note that changes in interest rates are not immediate and may take several months to feed through to the economy and the housing market. Therefore, landlords need to keep this in mind when making decisions about moving on to a fixed or variable rate in the upcoming months.

How Section 24 affects mortgage interest payments

Another factor that affects landlords’ mortgage costs is Section 24, a tax rule that was introduced in 2017 and fully implemented in 2020. Section 24 means that landlords can no longer deduct their mortgage interest payments and other finance costs from their rental income before calculating their tax bill. Instead, they can only claim a basic rate tax relief of 20% on these costs.

This means that landlords who pay higher or additional rates of income tax will pay more tax on their rental income than before. It also means that some landlords who were previously basic rate taxpayers may be pushed into a higher tax bracket due to their increased taxable income.

According to Hamptons, Section 24 has reduced the average annual profit of a landlord by £1,000 since it was introduced. It has also made some properties less profitable or even loss-making for some landlords, especially those with high levels of borrowing or low rental yields.

Landlords who are affected by Section 24 may consider various options to reduce their tax bill, such as incorporating their property business, switching to a lower interest rate mortgage, increasing their rents or selling some of their properties. However, each option has its own pros and cons and may not be suitable for every landlord. Therefore, landlords should seek professional advice from a qualified accountant or tax adviser before making any decisions.

Summary

The recent interest rate hike by the Bank of England has significant implications for landlords and their tenants. It affects their mortgage costs, income, cash flow, profitability, rents, supply, demand and security.

Landlords should be aware of these impacts and plan ahead for different scenarios. They should also keep up to date with other changes that may affect them in 2023, such as new rules for tenants’ rights and capital gains tax

A word from us…

At Intra Capital Estates, we understand the complexities of the rental sector and are committed to supporting landlords in navigating these changes. Our team of experienced professionals is here to assist you with expert advice, tailored solutions, and comprehensive property management services.

If you have any questions or would like to learn more about rising interest rates, its implications, or our range of services, we invite you to get in touch. Our dedicated team is ready to address your inquiries and provide the assistance you need to thrive in the evolving rental landscape.

Stay informed, stay proactive, and let Intra Capital Estates be your trusted partner in the ever-changing world of property management.

Please note that the information provided in this blog post is intended for general guidance purposes only and should not be considered as legal advice. Visit gov.uk for more information.