Landlords’ mortgage interest bill has risen by 40% in a YEAR… and is now eating up more than a third of their profits

Landlords are seeing their profits hit by higher mortgage rates, according to new analysis from the Hamptons real estate brokerage group.

It was found that landlords are paying 40 percent more in mortgage interest today than they were a year ago.

Mortgage investors who buy and rent mortgages spent an average of 37 percent of their rental income on mortgage costs in August, although many were still protected by fixed interest rates agreed before the cost increase.

Rising: Mortgage interest accounts for a larger portion of landlords’ profits

This is up from 28 percent a year ago and from 24 percent in November 2021, before interest rates started rising.

The rise in mortgage costs across the industry comes even as the number of outstanding buy-to-let mortgages has fallen since November 2022 as investors have either paid off their debts or sold them.

It also comes at a time when rents are rising rapidly.

Hamptons said annual rental growth across the UK remained in double digits in September, with the average cost of a new rental rising 11.7 per cent compared to the same period 12 months ago.

According to Moneyfacts, the average two-year fixed rent is currently 6.24 percent.

This means the average landlord requiring a £200,000 interest-free mortgage will have to pay £1,040 a month in mortgage costs if they buy or remortgage a two-year mortgage at the current time.

Add to this cancellation periods, repairs, maintenance, brokerage fees, compliance checks, insurance and service fees and you can see how many landlords rely on rising rents to make a profit.

With an average outstanding interest rate of 6 percent, Hamptons estimates that nearly two-thirds of the rental income paid to mortgage landlords goes toward paying mortgage interest.

Rising bills: Landlords are paying 40% more in mortgage interest than in August 2022, equivalent to an extra £4.3bn a year

Double-digit rental growth: Hamptons says the average UK rent is now £1,325 per cubic meter, up from £1,186 in September 2022

Fortunately, many landlords remain protected from short-term higher rates through their existing fixed contracts.

According to UK Finance, there are a total of 2,030,000 buy-to-let mortgages outstanding, most of which are also fixed rate.

About two-thirds are on fixed rates, with the remainder on a tracker rate or a standard variable rate.

As landlords’ fixed-rate mortgage agreements expire, the number of low mortgage rates will continue to decline unless interest rates fall significantly.

Hamptons estimates that landlords are currently paying a total of £15 billion in mortgage interest and expects this figure to rise as cheaper fixed-rate deals come to an end.

Erosion of profit margin: The average share of mortgage costs in the burdened landlord’s rent is increasing, although many landlords are protected from rising interest rates until the end of their fixed contract term

Aneisha Beveridge, head of research at Hamptons, said: “With mortgage interest rates often being the biggest cost for landlords, the pace at which rates have risen has put pressure on investors.”

“Even if there are no further interest rate rises from the Bank of England, over the next two years we could see the amount of mortgage interest paid by landlords exceed £20 billion.”

“This can result in eating up just over half the amount that landlords receive in rent with a mortgage.”

“For some investors this will be unaffordable and they are likely to exit, maintaining upward pressure on rents.”

Mortgage interest rates are falling

Mortgage rates have fallen in recent weeks, providing investors with much-needed respite.

While average interest rates remain above 6 per cent for both two- and five-year fixed contracts, landlords can now achieve an interest rate of under 5 per cent in some cases.

One lender, the UK arm of State Bank of India (SBI UK), even offers a two-year fixed interest rate of 3.9 percent for those with at least 50 percent deposits or equity. However, the deal is negatively affected by a hefty brokerage fee of 5 percent.

Apart from SBI UK, most of the lowest two and five year fixed rate contracts are just under the 5 per cent mark.

Even at that level, Hamptons says the average landlord’s ability to make a profit will diminish.

The analysis suggests that at a 5 percent interest rate, the typical mortgage landlord will spend 54 percent of their rent on mortgage interest.

Similar to SBI UK, most deals around the 5 percent mark also incur high brokerage fees, which also need to be taken into account.

Nicholas Mendes, mortgage technical manager at mortgage broker John Charcol, says many landlords are facing difficult decisions despite recent improvements in interest rates.

He added: “We are seeing more and more landlords expressing their frustration with the current climate and are more willing to opt for a shorter fixed rate or variable terms to give them the flexibility and freedom to sell a property .”

“Landlords need to have difficult conversations with tenants. We have seen many landlords opting against annual rent increases as they are equally aware of the pressure this can place on households.”

“Only when the renewal occurs will they be confronted with the cold truth that they can no longer have a moral compass if they want to secure better terms than their previous lender.”