How will rising interest rates affect mortgage payments?

For many years property investors and landlords flooded into the rental market as interest rates were low and there were plenty of deals on buy to let, fixed rate and variable rate mortgages.

With the Bank of England raising the base rate in recent months, we've seen a huge effect on mortgage rates and mortgage payments for both homeowners, landlords and property investors. As the base rate change impacts the mortgage market and increasing interest rates hit hard, mortgage lenders are limiting the mortgages and offers to both individuals, landlords and property investors.

In this blog we look at the impact on both homeowners and landlords with buy to let investments that higher interest rates have. We consider the impacts on those people with a variable interest rate mortgage or fixed rate mortgages where the mortgage deal period is ending. We also look at the action you can take to mitigate some of the rate increase you may be facing.

The affect of interest rate rises

Affording mortgage payments

As interest rates rise, and mortgage repayments many individuals, landlords and property investors may struggle to afford the higher monthly payments that they face.

Those landlords and individuals with a variable rate mortgage, will be facing increasingly higher costs. However, it's worth noting that at 0.50% interest rate rise on a £150,000 normal repayment mortgage will only equate to around £40 per month increase in mortgage payments.

Mortgaged landlords nearing the end of fixed mortgage deals will almost certainly see their monthly costs soar. Those landlords and homeowners with a fixed rate mortgage that are coming to the end of their term will likely be faced with significantly higher monthly mortgage payments. Those due to refinance soon are also likely to see fewer deals at much higher rates than previously seen.

However, it's not all bad news. Some landlords and homeowners will be on fixed rate mortgages for a continuing period and some individuals and landlords will not have any mortgage borrowing at all, assuring that these rises won't affect them currently.

Impact on the housing market in the UK property market

Interest rate rises often slow down the property market and can cause property to lose value. Therefore, landlords and property investors will be affect with their capital not increasing in value at the same rate they have been previously used to or indeed decreasing in value.

It has been estimated by Halifax and Nationwide that in the year to August 2023, house prices dropped by around 5%.

With the costs of buying and renting rising, there may well be a reduction in the number of people moving house, therefore meaning a more stagnant property market.

As the cost-of-living crisis hits and rising mortgage rates continue, the UK property market does look to be struggling.

Impact of interest rate rises on the rental market

Rising interest rates will undoubtedly also impact the overall rental market. With many areas already having a shortage of rental stock, there may be increased demand for rental property. Rising interest rates will make property ownership less affordable, meaning more people will look to rent, piling further pressure on the rental market which in turn, increases both demand and pressure on the already stretched rental market.

Rental rates

We've seen rent rises in the past few years, and this is likely to continue. It has been predicted that the average rent increases in 2023 will be 10%.

Many tenancy agreements limit the scale and frequency of rent increases, which may limit landlords from raising rents immediately or by too much to cover increasing costs. However, landlords facing a monthly payments rise may need to pass on these increased costs to their tenants through higher rents.

It is worth noting however, that it is not always interest rates that impact rental rates. If your rental property is in an area that lacks demand, then you won't be able to raise rents without impacting your ability to find tenants. Properties in areas with strong demand will have more likelihood of being able to increase rents.

Rental demand

It is likely that due to mortgages being more expensive and monthly repayments increasing that the demand for rental property will increase. This is due to more people opting to rent when they can't afford to buy.

Landlords profit margins squeezed

Over the last few years we've seen a raft of legislation and government crackdowns on the landlord market that have increased costs for landlords. The rise in interest rates will only add to the strain already being felt by landlords and will be another factor that will squeeze the profit margins of landlords (unless you pass on mortgage rises to your tenants in the form of higher rents).

Many buy-to-let landlords use interest-only mortgages to help generate greater cashflow, rising interest rates will be devastating for their profit margins.

Landlord market

Whilst interest rates alone won't mean a mass exodus of landlords from the market, in the past few years we've seen fewer and fewer landlords staying in or entering the buy to let market. Some people who were looking to enter the market may be deterred from entering due to the diminishing profits from this type of investment.

Some landlords, who are unable to afford the higher costs of borrowing, may be forced to sell their properties and exit the buy to let market altogether, thereby potentially affecting the supply of rental properties.

What can you do to offset the affects of rising mortgage payments?

Both landlords and homeowners need to be aware of the potential impacts of rising costs and interest rates. There may well be steps you can take to offset some of the impact of these increases such as:

• If you are not struggling to make monthly mortgage payments, the consider making overpayments to reduce your mortgage debt and reduce interest payments or your loan amount overall. However, check to see if your current mortgage has any over payment or early repayment charges.
• If your current deal is coming to an end, or you are on an expensive mortgage deal, look to swap to a new mortgage, new deal or switch from your existing mortgage lender to a new mortgage lender.
• Talk to a mortgage broker to find you the best deal and mortgages currently on the market.
• Opt for a repayment buy to let mortgage rather than an interest only mortgage. Whilst these mortgages have been less favourable for landlords in recent years, paying down a loan with strong cashflow could be an option to some landlords.
• Opt for a fixed rate mortgage now to offset any future interest rates rises.
• If you own rental properties personally and are trying to cope with rising costs, it may be worthwhile considering incorporating your properties to hold them in a limited company. Seek advice from dns accountants before doing this as this is a complex area of property tax.
• Consider disposing of poorly performing buy to lets that become financially unviable.
• Consider buying off-plan properties that may come with flexible payment plans.
• Don't do anything drastic if you can weather the storm for now, as interest rates and costs may reduce or level off in the longer term.

Conclusion

Whether you are on a standard variable rate mortgage, tracker rate mortgage, or fixed rate mortgage, you may be affected by the mortgage interest rate rises now or in the future. Trying to manage your rising costs and planning how you can take action to offset these will be worthwhile.

The economic impacts of higher mortgage rates on the rental market are complex and difficult to predict. However, here at dns accountants, we have a highly experienced team of experts in both the landlord market and property tax. They can advise you on the best course of action for you. Contact dns accountants on 03330 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

This information do not represent financial advise. We encourage you to speak to a financial adviser.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.