Will rate hikes make rent increases inevitable? - InterestRate.co.uk
rent hikes

Will rate hikes make rent increases inevitable?

The Bank of England has raised interest rates six times in the past eight months, taking the base rate from 0.25% to 1.75%. This included a series of 0.25% rises followed by the latest super-sized increase of 0.5%. As the central bank continues to struggle with soaring inflation, further rate hikes could be on the cards this year.

The increases have affected many homeowners who are now seeing their variable rate mortgage repayments soar. However, landlords are also bearing the brunt of the hikes, with the rate increases halving their average profits. According to reports, if the base rate rises to 2.5%, profits could become a loss, resulting in many landlords deciding to sell their rental properties.

This will put increased pressure on renters and could lead to severe supply and demand problems in the property rental market. As a result, the cost of rents is likely to soar as landlords either try to reduce their losses through increased rents or sell up and reduce the number of rental homes available on the market.

Related article:   Interest rates bite but spending soars
high rent

A massive impact on profit margins

According to reports, many landlords with buy-to-let properties have interest-only mortgages to increase cash flow. However, this means they are hit all the harder when interest rate increases are implemented.

Figures from one mortgage broker, L&C Mortgages, show that a two-year fixed-rate buy-to-let mortgage at 60% LTV increased from 1.25% to 3.12% between October 2021 and now. This means that a landlord with an interest-only mortgage for £200,000 will have seen monthly repayments rise from an average of £209 in October to £521.

Related article:   Traders warn of further interest rate hikes to tackle inflation

For many landlords, the interest rate hikes equate to thousands of pounds more each year in mortgage repayments. Without hiking rents considerably, this could lead to them being unable to keep on top of their repayments, which could then lead to their assets being repossessed.

Nathan Emerson, chief executive of estate agent body Propertymark, said: “Over the past six months, we’ve seen significant shifts in trends that professionals in the sector had been accustomed to. Mortgages including buy-to-let, which are on short-term, fixed contracts, have been at historically low interest rate levels for years but are now rising sharply. Property owners seeing increases to their monthly repayments are having to raise rents. This is leaving many renters in difficulty due to affordability at a time where other costs are also rising.”

Related article:   Reserve bank hikes rates 50 basis points to curb inflation
rent increases

Renters could face considerable issues

The situation could lead to ever-increasingly problems for renters looking to find a home. One of the critical issues is that rents could end up soaring due to the rate hikes as landlords struggle to control their finances.

On top of this, renters are struggling with soaring living costs in the same way as homeowners, so in addition to finding more money for rent, they also have to find more cash to cover the cost of essentials such as food and energy.