Landlords with a buy-to-let mortgage are braced for the cost of borrowing to soar in the next two years due to rising interest rates. It could affect the profitability of your property portfolio. 

According to figures from the Intermediary Mortgage Lenders Association (IMLA), those with mortgaged properties anticipate the cost of borrowing to jump by a massive 80% over the next two years as fixed-rate mortgage deals come to an end. 

To tackle high inflation, the Bank of England has increased its base interest rate several times throughout 2022 and 2023. This may have a direct effect on the cost of borrowing, including mortgages. 

Mortgage holders that have had a fixed-rate deal over the last few years will have been shielded from interest rate rises so far. However, as these deals expire, you may find it difficult to secure a comparable deal and outgoings might increase significantly as a result. 

Indeed, according to the IMLA report, landlords expect median average annual profits to fall from around £9,000 in 2023 to £7,700 by 2025. 

High inflation may have affected other landlord expenses 

While your mortgage might be among your largest landlord expenses, the rising cost of living is likely to have affected other outgoings too. 

The cost of maintenance work, estate agents, or insurance may all have increased over the last two years as well to place further pressure on your budget.  

The IMLA also calculates that 58% of landlords are already paying more tax due to the removal of the mortgage interest deduction. In addition, 64% of landlords said increased regulation had led to higher costs. 

Buy-to-let mortgages in arrears increased 29% in the third quarter of 2023

Data from UK Finance suggests some landlords are already struggling to meet rising costs.

The figures show 11,540 buy-to-let mortgages were in arrears of 2.5% or more of the outstanding balance between July and September 2023. That’s 29% higher than in the previous quarter.

In addition, 450 buy-to-let mortgaged properties were taken into possession in the third quarter of 2023. 

While the figures are relatively small when compared to the total number of buy-to-let mortgages, the trend indicates that more landlords could fall into arrears as fixed-term mortgage deals come to an end. 

Finding the right mortgage deal for you could boost your portfolio’s profitability

Despite the challenges, the IMLA report found that 53% of mortgaged landlords plan to buy more rental property over the next five years. Only 21% think they will sell property within this time frame. 

Whether you plan to add more properties to your portfolio or not, finding the right mortgage deal could help you get the most out of your investment. Even a seemingly small difference in the interest rate you’re paying could add up over the full term of the mortgage.

Let’s say you borrow £150,000 through a 5-year fixed-rate interest-only mortgage. With an interest rate of 3.5%, your monthly mortgage repayment would be £438. Over the five years, you’d pay £26,274 in interest. 

Now, if the interest rate increased to 5%, your monthly repayments would rise to £625, and the total interest you pay would be more than £37,000. 

So, taking the time to find a mortgage deal that suits your needs and offers a competitive rate of interest could save you thousands of pounds in the long run. 

Of course, the interest rate isn’t the only area you might want to consider when weighing up your mortgage options. You may also want to think about how much you could borrow through each lender, or whether you’d need to pay a fee if you wanted to reduce the outstanding balance. 

Usually, when a mortgage deal ends, you’ll be moved on to your lender’s standard variable rate (SVR), which often isn’t competitive. As a result, it often makes financial sense to look for a new deal. Typically, you can lock in a new mortgage deal six months before you need it to start, which could help you avoid paying the potentially higher SVR. 

Contact us to talk about your buy-to-let mortgage needs

If you’re searching for a new buy-to-let mortgage, we could help. As mortgage brokers, we could offer guidance throughout the process and aid you in securing a deal that’s right for you. We may be able to find a competitive interest rate that cuts your outgoings and increases the profitability of your property portfolio.

Please contact us to arrange a meeting to talk about your needs. 

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Some buy-to-let mortgages are not regulated by the Financial Conduct Authority.

Your property may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 10/01/2024