Mortgage Matters - Understanding the Recent Increase in Rental Values in the Private Rented Sector
Noticed a rise in rental values in the private rented sector? It may be due to increasing borrowing costs. While some landlords are benefiting from low fixed rates, others face significant challenges with doubling borrowing costs. Learn more about its impact on landlords & financial considerations in this blog.
The Private Rented Sector (PRS) has been experiencing a recent increase in rental values, but this is not necessarily a reason for landlords to celebrate.
The primary reason for this increase is the rise in borrowing costs, which has put pressure on financing rental properties. Landlords with fixed rates may still have low rates for up to four more years, while those with minimal borrowing or none at all will be pleased with the current rise in rental income.
However, landlords with high levels of borrowing who need to fix another rate may be faced with products that double their borrowing costs.
The increase in mortgage rates started prior to the mini-budget in October 2022, but it was a slow increase and not entirely unexpected. In May 2022, it was possible to get 75% borrowing below 2%, but six months later, it was closer to 6%, trebling borrowing costs.
Rates have been slowly declining since then. It is worth noting that fixed rates are not directly connected to the Base Rate, as lenders can use their own funds or the Swap Market.
Today's remortgage rates are as low as 4.03% for a 2-year fix or 4.29% for a 5-year fix. Some borrowers may benefit from lower rates from their current lender through product switch or transfer products, but some may find their particular lender isn't that generous.
Tracker products are linked to the Base Rate, and although they may seem high at the moment, it's predicted that the Base Rate will fall by the end of the year and continue to do so, albeit slowly. For those willing to pay a higher rate now, they are likely to benefit in the near future when the trackers fall.
Some landlords may want to sell, whether they are losing money, or the borrowing over a large portfolio needs to be reduced, or they feel that property has peaked, and it's time to cash out. In these scenarios, all financial factors should be weighed up, including how much Stamp Duty was originally paid and cannot be recouped, mortgage early repayment charges, Capital Gains Tax liabilities, and possible future IHT issues.
In conclusion, while some landlords are happy with the current rise in rental income, others face significant challenges due to the rise in borrowing costs. Landlords should carefully consider their financial options and weigh up all the factors before making any decisions.
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