In its latest Financial Stability Report, the Bank of England has revealed a new forecast that projects a significant rise in average monthly payments on buy-to-let (BTL) mortgages. According to the report, landlords can expect their monthly payments to surge by approximately £275 by the end of 2025. The announcement comes as a result of several factors impacting landlords’ profitability, including higher interest rates and structural changes affecting the sector.
The combination of rising interest rates, adjustments to income and capital gains tax rules, proposed changes to building energy efficiency regulations, and enhanced tenancy protection measures have placed immense pressure on landlords. The report highlights the interest coverage ratio (ICR) as a crucial metric for evaluating rental income against interest payments. Landlords with higher debt-servicing costs relative to rental income, indicated by a low ICR, are at a greater risk of experiencing repayment difficulties.
Similar to owner-occupier mortgages, the increase in interest rates translates into elevated mortgage servicing costs when fixed-rate deals need refinancing. As most BTL mortgages are interest-only, the impact of higher rates is more pronounced. Consequently, the Bank of England forecasts an average rise of £275 in monthly repayments for BTL mortgages by the conclusion of 2025.
Ben Beadle, Chief Executive of the National Residential Landlords Association, responded to the forecast by emphasizing the burdensome situation faced by responsible landlords. He outlined the three options they currently confront: exiting the market, thereby exacerbating the existing shortage of rental housing, raising rents, or absorbing escalating costs that many landlords simply cannot afford.
Beadle further highlighted the disparity between support provided to homeowners through the Government’s Mortgage Charter and the lack of corresponding assistance for the private rented sector. He called upon ministers to intervene and safeguard the market from the repercussions of mounting costs. For renters, Beadle urged immediate action to unfreeze housing benefit rates, ensuring tenants can cover their rent payments. Additionally, he advocated for the abandonment of tax hikes on the sector as a means to stimulate the supply of homes for rent, addressing the pressing need among tenants.
As landlords brace themselves for these anticipated financial challenges, the debate surrounding support for the private rented sector and the potential consequences for tenants intensifies. Time will tell whether policymakers heed the calls to take decisive action and mitigate the impact of growing costs on landlords and renters alike.