The impact of interest rate changes on BTL mortgage

As of mid-July 2023, the average rate on a two-year fixed-rate BTL mortgage hit 6.96% - surpassing the previous 6.9% peak witnessed after the mini-budget last October. The figures, collected by Moneyfacts, were the highest since the company began collecting data in 2011 and are more than double last year’s rate.

As well as soaring interest rates are the additional challenges of tax hikes – after the tax-free allowance for landlords selling a property was reduced in April 2023 – and red tape – with changes such as the Renters’ (Reform) Bill and energy efficiency changes coming down the line. It paints a bleak picture for BTL landlords, particularly for those on interest-only or variable-rate mortgages. 

With little to no help available from the Government, as well as fewer products available as a whole, the BOE has already warned that landlords have little choice but to raise prices for tenants. In June, for example, it was estimated that landlords would need to raise rents by £614 a month in London and the southeast to remortgage at current rates without making a loss. 

A report in July by consultancy Capital Economics, meanwhile, suggested that refinancing could push costs (inclusive of interest, tax and operational expenses) beyond rental income on more than a fifth of UK properties. And that means landlords lose money if they don’t put rents up. 

The challenge then becomes whether tenants can afford to sign up in the first place or may default on rent payments at a later date. Both the BOE and Capital Economics have warned that may force landlords to sell their properties and exit the market altogether – which in turn could put downward pressure on UK house prices.

For those with enough of a buffer, because they are operating in a market where they know that they will still get tenants despite rental price increases, there is the opportunity to use their improved yields to increase their portfolios further, especially if they can snap up properties that other buy-to-let landlords are disposing of. 

As traditional mortgage rates also remain high, more prospective buyers might be forced to rent instead, pushing up rental demand and the likelihood of getting rental deals signed – even at higher rates. But landlords will have to look carefully at affordability for both them and their tenants as well as the management of their BTL portfolios to decide what is right for them.