UK landlords paying 40% more mortgage interest

Upward trend: Residential housing developments under construction in the Hackney borough of London. On an annual basis, the United Kingdom’s rents rose roughly 12% in September, the second fastest increase on record. — Reuters

LONDON: The bad news keeps coming for the United Kingdom’s lettings market, as a surge in mortgage payments pushes more landlords to the brink and threatens to pile extra misery on tenants.

Landlords paid 40% more mortgage interest in August than the same month a year ago, equating to an extra £4.3bil (US$5.3bil), according to a report from broker Hamptons International.

Mortgaged landlords handed over an average of 37% of their rental income to pay interest in August, up from 28% a year earlier.

“For some investors, this will be unaffordable,” said Aneisha Beveridge, head of research at Hamptons. “They will likely bow out, keeping upward pressure on rents.”

UK households are facing a stream of pressures triggered by a rapid increase in interest rates and the worst cost-of-living crisis in a generation.

Tenants are bearing the brunt of the turmoil as landlords, who often borrow through interest-only mortgages, making them particularly exposed to rate hikes, either sell or increase rents to deal with extra costs and tougher regulation.

It’s come as a shock to many landlords after a long-term decline in borrowing costs between 2015 and 2021, when their total mortgage interest bill decreased by 3%, even as the amount of mortgage debt held by landlords rose 43% through those years.

Investors are now collectively paying almost two thirds more in mortgage interest annually than when rates bottomed out in November 2021.

The cost pressure is set to continue as more landlords roll off fixed loans that were agreed when rates were lower.

The total £15bil collectively paid in mortgage interest annually would climb to almost £27bil if the average mortgage rate on outstanding landlord debt stood at 6%, according to Hamptons.

The average new two-year fixed-rate deal was over 6.4% last week, according to Moneyfacts Group Plc.

Hamptons offered tenants a glimmer of hope when it said the rate of rental growth slowed slightly month-on-month in September.

Southern England and Scotland bucked this trend, with prices continuing to accelerate from an already high level.

Still, on an annual basis, the United Kingdom’s rents rose roughly 12% in September, the second fastest increase on record.

Rents are soaring the fastest in London, where the average monthly cost of letting a property was 16% higher than a year earlier.

“Even if there are no further rate hikes by the Bank of England, we could see the amount of mortgage interest paid by landlords exceed £20bil over the next two years,” Hamptons’ Beveridge said.

“This has the potential to eat up just over half the amount mortgaged landlords receive in rent.” — Bloomberg

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