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Landlords, it’s time to build your reserves – BDRC

by: Mark Long
  • 06/05/2014
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Landlords, it’s time to build your reserves – BDRC
In many ways, there's never been a better time to be a buy-to-let landlord.

Rental yields are strong, tenant demand is high, arrears and voids are falling and after a period in the doldrums, most portfolios are gaining real capital value. So what keeps landlords awake at night? How worried are landlords about the prospect of a rise in BTL mortgage interest rates?

To provide some context, three-quarters of landlords borrow to fund their property portfolios. In our most recent Landlords Panel survey, the typical borrower had six individual BTL loans with an average of four different lenders.

We asked over 1,000 landlords to tell us how confident they are that they could meet their repayment obligations if rates were to rise from 0.5% through to 3.0% in 1/2% increments.

The results are shown below:

Landlord confidence

0.5% rate rise

1.0%

1.5%

2.0%

2.5%

3.0%

Very confident

83%

75%

64%

50%

39%

34%

Quite confident

15%

20%

24%

31%

31%

29%

Not very confident

2%

3%

9%

13%

17%

20%

Not at all confident

0%

2%

3%

6%

12%

17%

Rises of 1.5% or less would be of relatively minor concern to the vast majority of BTL borrowers; but at 2.0% or more, repayment confidence begins to erode sharply.

We asked landlords to tell us what the actual impact of a 2.0% rate rise would be. For most (72%) the impact could be absorbed but with a detrimental impact on profitability. However, there would be some serious fall-out, notably:

– 26% would increase their rents to re-coup costs – not great news for tenants 
– 16% would re-mortgage to products with a better rate or longer term
– However, most seriously, 16% would really struggle to absorb the increase and/or would need to leave the rental sector entirely, with those in the 11-19 property category most at risk of business failure.

Given that there’s never been a cheaper time to be a BTL borrower, landlords should be thinking now about building up their reserves as protection against potential rate rises.

Mark Long is director of BDRC Continental

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