Landlords looking to re-mortgage until December 2024 at a typical 6.5% rate face an alarming 52% jump in their monthly mortgage payments, according to credit ratings agency DBRS Morningstar.
It warns that if interest rates continue to climb, some BTL borrowers may find themselves unable to afford mortgage payments, as they could reach unmanageable levels – an effect even more pronounced for loan portfolios established after 2018.
About 17% of BTL loans are expected to undergo resetting during the next 17 months.
Its analysis of 72,059 BTL loans found that those with mortgages featuring higher loan-to-values and lower rental yields, particularly in urban areas with lower rental yields, face a higher degree of financial risk.
“We anticipate a further increase in BTL mortgage arrears and a probable reduction in BTL lending, which may lead to higher rates of home repossessions,” says DBRS Morningstar’s report.
This year, rent increases have outpaced wage growth, stretching the affordability of renters.
But UK wage growth is also picking up (by 7.8% from April to June 2023) which would restore some affordability.
DBRS Morningstar adds: “Hence, while we expect arrears and defaults on UK BTL to increase over the medium term, we expect these to stabilise, provided mortgages rates stabilise or come down and unemployment levels in the UK remain low.”
Spokesperson Lorenzo Coccioli explains that with only a typical 3.9% profit for the ‘average’ landlord, there’s a systemic risk for the private rented sector if this doesn’t improve.
“The UK housing market relies a lot on buy-to-let, as those private landlords with rented properties are helping plug the gap between supply and demand.
“The sector is also a driver of new builds – 50% of new builds in London are build-to-rent - so if demand and incentive for new builds goes away, the supply falls.”