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Complex Buy To Let

BTL mortgage rate rises won’t have ‘immediate and direct’ impact on rents, Paragon CEO says

Anna Sagar
Written By:
Posted:
July 13, 2023
Updated:
July 13, 2023

Increasing buy-to-let mortgage costs do not have as much of an “immediate and direct” effect on rents as people might think, a leading buy-to-let specialist lender CEO has said.

Speaking in a Treasury Committee session asking mortgage lenders about the impact of rising rates, Paragon chief executive Nigel Terrington (pictured) said that there were around 5.5m properties in the private rented sector (PRS) and based on UK Finance figures there were around two million mortgages in the sector, meaning buy-to-let mortgage holders only represented around 37 per cent of the PRS.

“There are 63 per cent of people who do not have a mortgage, so they are not experiencing an increase in their funding costs,” Terrington noted.

He added: “The vast majority of lending into the buy-to-let market is on a fixed rate basis. About 90 per cent of our lending is on a fixed rate basis.”

He noted that whilst most of this was interest-only, it had “very strict affordability tests” and it lent at lower loan to values.

 

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Shortage of PRS supply and landlords key issue

When asked again whether landlords could “quickly pass” on mortgage rates rises to their renters, with one MP pointing to a five per cent increase in rent in May, Terrington noted that there was “typically a very clear long-term correlation between wage increases and rental inflation”.

“You can track this back decades, obviously there are leads and lags between that as things don’t always happen in the same year but that’s what typically happens,” he noted.

Terrington said that wage inflation was running at around 7.6 per cent in the private sector and rental increases according to ONS data at five per cent was not “really out of line with that general trend in wage inflation”.

“I think if [that wage inflation and rental inflation trend] it is being disturbed at the moment one of the factors behind it is that there is a significant shortage of rental property. That everywhere, everywhere you look, you see long queues of tenants looking for a rental property,” he said.

Terrington continued that the number of landlords in the PRS was “lower than there has been, probably the only time since 2015”.

He explained that this was due to rising costs of being a landlord, not just funding costs, but the overheads of running property and significant tax changes introduced in 2015.

“That bit on the landlords over a number of years, so many are now being taxed largely on the revenue they receive rather than the profit and in addition to that there’s a three per cent stamp duty surcharge, which is a disincentive to buy.

“So, the landlord’s costs have gone up and it has become a less attractive investment as a consequence and so there is a shortage of property in the PRS,” he said.

He added that he suspected the sector “might be moving into a point where you start to hit affordability constraints for tenants”.

“In which case, it doesn’t matter what you want to do as a landlord there’ll be no real capacity to increase rents,” Terrington said.

“The fundamental thing is we need more supply into the sector,” he added.

 

Unfreeze housing benefit

Terrington was also asked about how many renters were reliant on housing benefit, he said that around 20 per cent of the PRS was in that category.

“What you have tended to find those that become has become less significant in recent years, because there’s been a freeze on the local authority housing allowance that’s available,” he added.

Terrington said that it would be “useful” for the government to look at unfreezing house benefit.

“If there’s no real council house alternative then that is their only source and without changing the whole structure of the PRS there is a direct impact because those social-focused tenants find it a struggle to compete with the private sector,” he noted.

 

‘Areas of concern’ for Renters Reform Bill

Regarding the Renters’ Reform Bill, Terrington said that it was “supportive” of the changes to Section 21 but there were still “areas of concern”.

He noted that to go through an eviction process you have to go to court and the government had promised that changes to the court process would be made to “deal with this”.

“But we already know that the court process is already quite full, and I’m therefore nervous about whether there will be enough capacity and to ensure that it won’t overload the court process, so you could end up with massive problems as a consequence,” Terrington said.

He added that in the student market, currently students want to book the next year of residence a year in advance, which was good for landlords as they get a commitment 12 months forward.

However, in the current bill, tenants only have to give two months’ notice.

“If that’s two months before the end of the final term, maybe April, May, then that’s not long enough for a landlord to find a tenant for the following year. In which case they can’t market their property as available and they might find themselves without a tenant.

“Then suddenly there’s almost like a free for all for students trying to find property right at the end of the end of the term,” he added.

Terrington said that it had discussed the issue with the Department for Levelling Up and that had “acknowledged that this may need to be reconsidered but it’s a very real issue that needs to be resolved before it converts into an Act”.