What does the interest rate environment mean for landlord borrowers and their clients?

There’s no doubting that the next few months are going to be a tricky time for many landlord borrowers, particularly those who are coming off fixed-rate products and looking at a very different interest rate environment to the one they would have previously mortgaged within.

Our own assessment of where interest rates are likely to move is – perhaps unsurprisingly – on the upward trend, mainly due to the vast amount of volatility within the swap rate markets, which many lenders rely upon on in order to fund their product ranges.

At the same time, it looks fairly obvious that the Bank of England will raise Bank Base Rate (BBR) again next month, particularly as the most recent inflation figures breached the double-digit threshold, coming in at 10.1%. The big question will be, just how big an increase we will see?

The volatility in rates, and the upward trajectory, has clearly not been helped by the political situation, not least the overwhelming impact of the Mini Budget. Even now, as most of the tax-cutting measures have been reversed, we can see how mixed messages at a Governmental level can impact on rates.

While Jeremy Hunt appeared to have calmed the markets with his series of Mini Budget u-turns, the announcement made at PMQs that the Government intend to keep the pension triple lock – when it was being briefed that this might not be the case – resulted in five-year swap rates rising again. You can see why we are all crying out for certainty.

So, what does the interest rate environment mean for landlord borrowers and their clients? Well, from a purchase perspective, it is likely that many investors will bide their time when it comes to making future investment decisions.

This certainly doesn’t mean that buy-to-let investment has become any less attractive in terms of a long-term asset but it does mean that higher finance costs are going to be a fly in the ointment for many landlords who would ordinarily be looking to add to portfolios.

The fundamentals of the market do indeed remain strong. Our most recent Rental Barometer figures for Q3 this year, show that across all the regions in which Fleet Mortgages lends in England & Wales, yields were 5.4%, only slightly down on the 5.5% of a quarter earlier.

Three regions – Wales, East Anglia and Greater London – all saw an increase in quarterly yield, while the South East posted the same figure as three months earlier.

Yield is holding up for a number of reasons, most notably the significant amount of tenant demand that still exists for rental property, and of course the fact we currently do not have the supply to meet this demand in many regions of the country.

The big question going forward is how an increase in the cost of buy-to-let mortgages is going to impact on the sector, particularly in terms of utilising equity growth to fund future purchases, but also of course in terms of refinancing, and how this impacts on a property’s profitability.

It is I’m afraid likely that – should rates continue in their current vein – a number of landlords will be having to weigh up whether the increased cost of finance is enough to see them having to sell up, or if they can perhaps find a short-term finance solution which allows them to continue, or indeed to purchase, and look at their options again in say six to 12 months.

While we have seen a significant fall in the number of two-year fixed-rates available, we’ve also been able to launch a number of BBR Trackers which – even if BBR does rise – could still be a competitive option and would allow landlord borrowers to secure a shorter term solution, while (hopefully) we get a greater degree of stability that can be translated into more product options and competitive rates.

Of course, the current situation is not ideal, but private rental sector property remains in perhaps greater demand than we have seen for some time. That is not going to change, even if house price values do fall back, as potential owner-occupiers are facing the same issues in terms of mortgage costs going up as landlord borrowers. If you cannot afford to buy, then what are your options for housing?

To that end, what’s important is for us lenders to keep providing advisers and their landlord clients with product options and a means to work through any short-term volatility in order to secure a longer-term solution in the future. We’ll continue to do this and continue to support the intermediary sector as they walk their clients through a very difficult rate environment.