Landlord Insurance

Buy-to-let market could be seriously harmed by rising interest rates causing sell off

Buy-to-let investors could be hit harder by rising interest rates than residential markets, creating a shortage of rental properties, experts have warned.

The mortgage industry is still reeling from the market turmoil caused by September's mini-Budget, which led to interest rates rising to 3% on November 3.

Even in October it was difficult to find a mortgage deal lower than 6%, as NimbleFins reported, and "criteria changes" mean investors are unable to borrow as much as they planned to.

This coupled with existing landlords selling due to increased tax and regulation, higher mortgage rates and a squeeze on personal finances means there is likely to be fewer rental properties coming onto the market, MPs have been told.

The Government's Treasury Committee heard evidence last week about how rising interest rates could hit the buy-to-let market.

About 40% of landlords have a mortgage on their properties, Property Industry Eye reports.

Chris Rhodes, chief finance officer at Nationwide Building Society, told the Committee it was now only "marginally profitable" or "loss-making" to buy a new property.

Ray Boulger, senior mortgage technical manager at broker John Charcol told the November 2 panel: "What we're seeing now is criteria changes and we're finding situations where clients are not able to proceed with the amount they originally planned to borrow because of criteria changes.

"It's not all about rate, it's rate and criteria, particularly stress test rates, they've been changed as a result of rates going up."

Stress tests look at how affordable mortgage payments may be for borrowers in the future. Mr Boulger added: "When you factor in the other impact of energy price increases and cost of living increases that can have a significant impact on what people can borrow."

He said the stress rate is "particularly a problem on buy-to-let".

Landlords needing a mortgage with a loan-to-value of more than 50% would find it "very difficult" with current stress tests, he said.

He added: "And the knock-on effect of that, combined with some existing landlords selling because of the more onerous tax regime and other regulatory requirements and higher mortgage rates, I think is going to have a quite serious impact on the availability of rental property over the course of the next year or two."

From April 2020, landlords have been unable to deduct mortgage costs from their rental income, meaning higher values are taxable.

All new tenancies or renewed contracts must also carry at least an E rating on the Energy Performance Certificate, with fines up to £4,000 for those failing to meet the criteria.

Charles Roe, director of mortgages at trade association UK Finance, said there were still products available, with mortgage lenders offering follow-on products to those borrowers coming to the end of a fixed-rate.

He said: "We're seeing the markets return to much more stability over the course of the last two to three weeks. As a result of that, swap rates (which lenders use to price mortgages) have come down and in turn lenders are reducing their mortgage rates."

While buy-to-let landlords face rising bills, many are passing this on to their tenants. Four in 10 under 30s are spending more than 30% of their pay on rent, according to the BBC.

The issue has been compounded by some landlords selling up due to tax rises, meaning a shortage of properties coming onto the market.

For landlords still in the rental market, it is especially important for them to consider landlord insurance to protect against unforeseen costs, including loss of rental income or rent guarantee if tenants are forced to move out or can't pay their rent.

Landlord insurance also covers liability insurance if a tenant or visitor is injured or has their property damaged, building insurance, contents insurance (for the landlord's items only), accidental damage and legal expenses, plus other cover if required.


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