Rising Interest Rates: What it Means for Buy to Let Mortgage Prisoners

Here is what we know about the feeling in the industry so far:

● LRG surveyed 271 landlords across its estate agency brands in Great Britain.

● 27% of landlords saw a shortage of rental properties in their area as a positive sign for future Buy-to-Let (BTL) investments.

● 24% of landlords saw increased rental yields as a positive sign for future BTL investments.

● Only 7% of landlords felt that energy efficiency upgrades would benefit the profitability of their investments by attracting higher rents.

● LRG’s managing director for lettings, Allison Thompson, believes that investing in rental properties is a good financial decision due to the shortage of rental stock and the potential to pick up bargains if property prices fall.

● LRG advises landlords to research supply and demand in their area and seek expert advice to ensure their purchase has good long-term prospects.

● Only 7% of landlords plan to exit the BTL market in the next year and only 12% plan to reduce their portfolio despite speculation to the contrary.

So Why the Concern and What exactly is a mortgage prisoner?

Although the above stats look promising, underneath it all there are existing investors that are stuck in a difficult position where they cannot refinance. A person who is unable to obtain a new mortgage deal is known as a mortgage prisoner. The inability may be due to personal situations like a poor credit rating, or due to changes in mortgage lender policies that now render them ineligible. In the case of BTL mortgages it is usually the later, meaning the investor is stuck on the lenders variable rate which in the current climate can now be greater than the market rent.

With rising interest rates, what does it all mean?

The Prudential Regulatory Authority (PRA) made changes in 2016 to how lenders assess affordability for buy-to-let mortgages by introducing a new Rent-to-Interest (RTI) calculation otherwise known as ICR (Interest Coverage Ratio). The purpose of this change was to ensure that rental income could cover both the mortgage and the mortgage interest, thereby preventing landlords from taking on excessive debt that their properties' rental income could not support and protecting lenders from mortgage arrears. The ICR for personal name borrowing is 145% at 5.50%, while for limited companies, it is 125% at 5.5%. As a result of this change, with the now higher interest rates, many rental properties and portfolios are no longer meet affordability criteria, rendering them essentially un-mortgageable for many landlords.

Following the announcement of the changes to the affordability criteria for buy-to-let mortgages, a brief grace period was allowed before the new calculations came into effect. During this period, many landlords chose to remortgage and take advantage of the more lenient criteria, with a considerable number opting for long term fixes. However, as these rates come to an end and are up for renewal, there is concern among these landlords that they may not be able to remortgage and will have to switch to the lender's standard variable rate (SVR), which is often significantly more expensive. Fortunately, it should be noted that there have been significant improvements to the approach of ICRs and how they are calculated, including nuances with fees and terms that can make them more manageable.

Are you a BTL mortgage prisoner?

Many landlords find themselves in this situation, where they are unable to remortgage or switch to a better deal due to stricter lending rules and higher stress tests. BTL mortgage prisoners may be paying higher interest rates than they need to, which can impact their cash flow and overall profitability. To avoid being a BTL mortgage prisoner, it's important to stay on top of your mortgage payments and maintain a strong interest coverage ratio. If you're struggling to secure a better deal, consider working with a specialist broker who can help you navigate the market and find a solution that works for your specific circumstances.

So what’s next?

Don’t let yourself become a buy-to-let mortgage prisoner. We have lenders who are receptive to individual circumstances and can unlock mortgage prisoners with specialist products. Speak to Matt at Knights Row who will be able to give you a clear understanding of your options and how to make the right decision based on your needs.