Landlords prepare for interest rate rise

The Bank of England has increased interest rates to their highest level in almost a decade. The rise of 0.25% may sound small, but it could cost the average landlord over £1000 per year. So how can landlords calculate their costs and keep properties profitable?

Calculating costs

According to the National Landlords Association (NLA), private property investors in the UK have mortgage borrowings of £464,000 on average. A rise of 0.25% on mortgages of this size represents extra interest payments of £1,160 per year for landlords and property investors.

Property investors with multiple mortgages will see their costs rise further than those with a single property. The type of buy-to-let mortgage on each property will make a big difference too. Letting agent Upad estimates that 50% of landlords are on fixed rate mortgages, so their rates won’t change until the deal lapses. It’s the other half, on variable rate mortgages, who may need to seek a fresh deal to avoid these new costs.

Sink or swim?

Some commentators have highlighted that the rate rise arrives as new government policies are already eating into property profits, including the 3% Stamp Duty surcharge and the reduction in mortgage interest tax relief. Consequently, many amateur landlords are moving their money into pension funds. A reported 20% of of buy-to-let landlords have made the move already, which could represent £28bn of investment diverted from property to pensions over the next five years.

For commercial landlords, and landlords operating as limited companies, cashing out may not be the right option; the predicted departure of so many amateur landlords should, in theory, reduce the rental stock and push up yields. But it seems many property owners are taking the initiative and raising rental prices in advance.

Rising rents

According to Arla Propertymark, the number of tenants reporting rent increases rose to 35% in June. In some areas the figure is even higher. London, for example, saw 49% of landlords raise rents. It’s the South West, however, where rents are rising fastest, with an average increase of 3.4% year-on-year.

For these rent increases to effectively counter the impact of new rules and rate increases, landlords must be sure that tenants can and will pay. This can be achieved by putting in place a sensitive, efficient enforcement process for rent arrears. For advice and information about how Dukes can help protect your cash flow, contact us today.