How Has Mortgage Market Changed in the UK?
In recent months, mortgage lenders have been pulling and reprising buy-to-let mortgage deals as interest rates continue to soar and the global financial crisis continues to unfold here in the UK. Landlords, already facing a tough market of uncertainty, higher interest rates and changing laws, are finding it increasingly difficult to obtain mortgages and make mortgage repayments on their properties. In this blog, we examine the difficulties landlords are now facing and how landlords could address these issues to stay in business and be profitable.
Mortgage rates have continued to rise since the disastrous mini-budget and are in line with consecutive hikes in Bank of England base rates. Since the mini-budget, many fixed-rate mortgages have been phased out and mortgage rates overall continue to rise in line with the highest inflation rates in over 41 years.
How Much Have Mortgage Rates Increased In The Last Few Years in the UK?
Mortgage rates in the UK have fluctuated over the past few years, but in general, they have been at historically low levels. In particular, in response to the COVID-19 pandemic, the Bank of England lowered its base rate to a record low of 0.1% in March 2020, which has kept mortgage rates low.
However, mortgage rates are influenced by a range of factors, including the economy, inflation, and competition among lenders, and can vary depending on the type of mortgage and the lender.
According to data from the Bank of England, the average interest rate for a two-year fixed-rate mortgage fell from 2.53% in January 2019 to 1.33% in January 2021, before rising slightly to 1.38% in December 2021. Similarly, the average interest rate for a five-year fixed-rate mortgage fell from 2.89% in January 2019 to 1.71% in January 2021, before rising to 1.79% in December 2021.
However, The Bank of England has raised its policy rate from 0.5% in February 2022 to its current level of 4% announced on 2 February 2023.
It's worth noting that while mortgage rates have been low, house prices in the UK have been rising steadily over the past few years, which can make it more difficult for some buyers to get on the property ladder.
What does this Means for New Buyers?
If you haven't fixed your mortgage yet when you plan to sell or buy a first property, you may need to reconsider your plans. Higher home prices, as well as higher interest rates and higher bills, could mean you're stretching your finances more than you're willing to at such an uncertain time. Even committed buyers could have trouble getting a loan if potential lenders factor all of this into their affordability calculation. In some cases, stamp duty reduction can help close the gap by reducing the need to borrow. Otherwise, if there is no other way to increase your down payment, you may need to compromise on where or what type of property you are buying. Of course, in an uncertain market, it is important to live with these commitments, so as not to be forced to move again in a potentially difficult market.
How is the Current Crisis Affecting Landlords?
Landlords who have taken out two- or five-year fixed-rate mortgages since the mini-budget in September are facing interest rates rising from about 2 percent to about 6 percent. Many landlords have interest-based buy-to-let mortgages, which means they now face monthly payments that go up by as much as two hundred percent!
What Factors Determine the Mortgage Rates in the UK?
There are several factors that can influence mortgage rates in the UK. Here are some of the most important ones:
Bank of England Base Rate: This is the interest rate set by the Bank of England, which serves as a benchmark for many lenders. When the base rate goes up, mortgage rates tend to go up too, and when the base rate goes down, mortgage rates tend to go down as well.
Economic conditions: Economic factors such as inflation, unemployment, and GDP growth can also affect mortgage rates. If the economy is doing well, lenders may be more willing to offer lower rates, while if the economy is struggling, lenders may increase their rates to compensate for higher risk.
Lender's business costs: The costs of running a lending business, including staff salaries, rent, and other overheads, can also impact mortgage rates. Lenders may adjust their rates to maintain profitability and cover their costs.
Competition in the market: When there is more competition among lenders, they may lower their rates to attract borrowers. This can be particularly true for new entrants into the market, who may offer more competitive rates to gain market share.
Borrower's credit history: Borrowers with a good credit history are generally seen as lower risk, and may be able to secure lower mortgage rates as a result. Those with poor credit histories, on the other hand, maybe charged higher rates to reflect the increased risk to the lender.
Loan-to-value (LTV) ratio: Lenders will often offer lower rates to borrowers who are able to put down a larger deposit, as this reduces the lender's risk. The higher the LTV ratio (i.e. the smaller the deposit), the higher the mortgage rate is likely to be.
It's important to note that mortgage rates can be influenced by a combination of these factors, and that rates can vary widely between lenders, products, and types of mortgages.
Stress Test Interest Rate Rises
A stress test is applied to a mortgage borrower's application to determine whether the borrower can pay off their mortgage at a given interest rate, even if the actual current interest rate is lower. Before the mini-budget, many lenders stress-tested landlords at interest rates of 6.75 percent or 7 percent, but stress tests are now taking place at 8 percent. Mortgage brokers report that higher stress tests will make buy-to-let unprofitable. In places like London and the South East, where yields are already low, many landlords can only borrow at a 50 percent loan to value (LTV), and landlords who need to borrow more than 50 percent of a property's value will find it more and more difficult.
If you're currently trying to enter the landlord rental market, or if you're a landlord looking to increase the size of your portfolio through borrowing, it's likely that the hire-to-own market will be loss-making. make a purchase for some newer rental companies now. The market sees many landlords having to raise rents to tenants just to cover increased mortgage payments while tenants grapple with the cost-of-living crisis.
Why are Mortgages Going Up?
Mortgages continue to rise due to rising inflation. In November 2022, the UK inflation rate reached 10.7%, with October registering a peak inflation rate of 11.1%. In order to stabilize the British economy, the Bank of England is changing interest rates - raising them to curb rising inflation. In December 2022, the Bank of England raised interest rates to 3.5%, the ninth hike in a year. This is the highest interest rate level in 14 years. This means that as a result of interest rate hikes, mortgage rates have risen for those borrowers who don't have fixed-rate mortgages, meaning higher repayments and more misery for landlords.
If you have a tracker mortgage, repayments increase immediately, while with a fixed-rate mortgage, you're protected until the end of your current deal. Many banks have now withdrawn or re-evaluated their mortgage operations, which means that the deals of the past are long gone and future landlords will inevitably be faced with much higher mortgage payments when the deals run out or when they want to get a new mortgage.
What Does it Mean for the Market?
If too many people can't buy or there are forced sellers, it affects the overall market. It's hard to see how a weakening could be avoided from here and there is a risk of significant price declines. If you live in a property you can afford and don't plan on moving in the near future, this is less of a concern. However, planning a move in the short term could make you reconsider whether you need to make an effort to afford a property that you won't be able to see in a few years.
Many landlords are faced with difficult decisions between increasing rents to break even or selling their properties due to increased mortgage costs. Many renters may find their rents unaffordable and may default on rent payments, affecting landlord profitability and the potential for landlords to lose money. This is all bad news for landlords of rental apartments. Falling prices mean that the security of loans is reduced, increasing the risk of mortgage defaults and eventual foreclosures. All of this will no doubt have a domino effect and have a significant impact on the rental market in the years to come.
Now is the time to keep an eye on your landlord's finances and seek professional advice from specialist landlord accountants. Here at PTA, we help thousands of landlords manage their finances and have a highly experienced team specializing in the buy-to-let landlord market. If you are struggling in the current market, contact us today for help and advice by calling our team on 07985689912 or emailing email@example.com