While the appointment of Prime Minister Rishi Sunak in October went some way to steady the turmoil, it is widely predicted that borrowing costs are unlikely to return to pre-pandemic levels.
Similarly, the resultant increase in the cost of borrowing has led to shorter shelf lives on mortgage products and a reluctance from lenders to offer higher loan to value (LTV) rates. This has resulted in borrowers adopting a “wait and see” approach to refinancing.
This is particularly noticeable in the buy-to-let (BTL) sector, where rental serviceability and affordability calculations are creating significant issues for landlords looking to remortgage as they are unable to borrow at their desired level.
As a result, landlords who are concerned about their borrowing capacity have been holding off until the eleventh hour.
BTL and private rental impact
Although mortgage enquiries in the market remain at high levels, the trepidation and anxiety is causing a lull in the level of actual mortgage applications. In the BTL sector, the ramifications of this are particularly significant.
With landlords delaying refinancing in the hope that the market will eventually correct itself, there will be a period of reduced activity before the dust fully settles by the middle of the year. Regardless, the days of operating in an historically low interest rate environment are over.
Given the fact that many landlords are very highly leveraged, this is especially worrying, as they are also likely to see a capital reduction of between 10 per cent and 15 per cent if predictions of a cooling housing market transpire.
With little room for manoeuvre, many landlords may find they have little choice but to move onto their current lender’s SVR by taking out a product transfer, the result of which is likely to lead to an increase in rental costs for tenants.
A new type of mortgage prisoner?
Another option for over-leveraged landlords is to consolidate their portfolio by selling off property. While this may seem like the best option for some, whether they equalise the value that they want to achieve remains to be seen.
One of the problems with the consolidation of portfolios is that it reduces supply in the private rental sector as they will likely be bought by an owner-occupier, leaving the existing tenant without a home, increasing competition and driving rents higher.
This is particularly concerning given the fact that tenant demand has already increased by 23 per cent in the last year, while the number of available rental properties has fallen nine per cent, according to figures from Rightmove.
With multiple forces driving up rents, another risk is defaulting tenants. The cost of living crisis, lack of supply and increased rents are already having an impact on client affordability, and continued downward pressure on finances places them at a higher risk of falling into arrears.
Moving into a house in multiple occupation (HMO) is an option for some tenants as these tend to be all-inclusive. However, with the cost of bills and utilities going up as well as council tax, rental yields for landlords are being squeezed there as well, which might be passed onto tenants.
All these factors mean there are multiple forces creating a perfect storm in the private rental market that is likely to leave landlords concerned about the viability of their investments and reduce the capacity available to future tenants.
A survey by SpareRoom found that 16 per cent of landlords were looking to leave the rental market due to increased costs and reduced profit margins, while many others have already started to scale back portfolios.
The means the UK is facing the very real possibility of a rental and homelessness crisis that will only serve to harm the most vulnerable members of the community such as renters, first-time buyers and those who cannot yet afford to buy their own home.
What is the solution?
While there is no immediate solution to resolving this crisis, it is very clear that the current government needs to act quickly to safeguard the rental sector.
For far too long, BTL landlords have been demonised by successive governments and blamed by the press for soaring house prices and the challenges faced by first-time buyers. But the truth is, landlords are vital to the UK housing market as without them, there would be no private rental sector.
This is a sobering thought given the fact that there are over one million households on the social housing register, according to charity Shelter England, and a shortfall of 1.5 million homes due to the repeated failure of successive governments to hit the annual build target of 250,000 homes since 2000.
Instead, successive tax and legislative changes have only served to undermine BTL landlords and the private rental sector.
One possible solution would be to give landlords temporary respite on the interest rate relief, which is unlikely as the government will then be accused of fanning the flames.
But with deposit and rental stress levels impacting affordability, this option may be worth considering if the rental market is to sustain itself. It could also help to reduce the need for rising costs to be passed onto tenants.
Higher interest rates and a lack of available property in the market is already impacting on the average age of FTBs. By doing nothing, the government risks driving this even higher and creating a smaller and more expensive private rented sector by forcing BTL landlords to sell up and move on, prompting a contraction in the market.
Instead of vilifying landlords, the government should focus on addressing the myriad of challenges and ways to help this important industry weather the current economic storm.
Doing nothing is not an option.
