House price dip: the impact of rising costs on buy-to-let

Landlords looking at mortgage repayments

The UK economy is in a turbulent period with inflation reaching a 40-year high. The cost of living and global energy crisis, combined with the impact of the mini-Budget, has created uncertainty in the housing market.

In an attempt to control inflation, the Bank of England (BoE) continues to increase the base interest rate, which looks set to keep rising this year.

Increasing mortgage rates, high inflation, and falling house prices mean landlords face a unique set of challenges in 2023.

So, how can buy-to-let landlords manage the impact of rising costs?

How high inflation affects the rental market

Inflation is when the cost of goods and services rise over time. It can be affected by things like demand and supply. Read our guide to inflation for more on how it works and why it’s rising.

High inflation can have some benefits for landlords, such as:

  • higher average property prices over time, meaning higher future sale prices
  • rental growth caused by rising demand if people choose to delay buying property due to higher prices

These factors can combine to increase yields for landlords. On the other hand, high inflation also has its downsides for the rental market, including:

  • higher maintenance and property upkeep costs
  • increased chance of rent arrears or tenants unable to pay bills

Issues like these could put pressure on landlords’ finances, making it harder to meet buy-to-let mortgage repayments.

Bank of England increases base interest rate again

In February, the Bank of England’s Monetary Policy Committee voted to increase the base interest rate to 4.0 per cent.

Between March 2020 and December 2021, the base rate was at an all-time low of 0.1 per cent. However since the end of 2021, it’s been increasing gradually as the BoE tries to curb inflation.

The recent base rate rise from 3.5 to 4.0 per cent was the tenth consecutive base rate increase. That being said, interest rates remain lower than the highs of 5.75 per cent in July 2007 and almost 15 per cent in October 1989.

What does this mean for landlords?

A higher base rate has led to more expensive mortgage repayments for landlords on variable or tracker buy-to-let mortgages.

Landlords with fixed deals will have felt less of an impact. However, the aftermath of last year’s mini-Budget means the cost of fixing a new deal is higher than it was before.

Following the market turbulence last autumn, when average mortgage rates for fixed deals were higher than six per cent, conditions have calmed in 2023.

Some lenders are now offering fixed deals below the BoE base rate at between three and four per cent.

Although average rates may continue to fall slightly during 2023, it’s thought that the days of interest rates at one and two per cent are over.

Read our guide to buy-to-let mortgages for more information on rates, repayments, and affordability.

How have rising interest rates and inflation affected house prices?

Due to inflation, costs are rising across the board. So, it’s unsurprising that mortgages have become more expensive. Inflation is partly responsible for this but it isn’t the only contributing factor.

In response to the economic uncertainty brought on by the mini-Budget, mortgage lenders removed their products from the market. And when they returned, they were much more expensive.

According to data from Moneyfacts, the average interest rate on a two-year fixed-rate mortgage was 6.6 per cent, and 6.5 per cent for a five-year fix after the mini-Budget.

And with incomes also being squeezed by the cost of living crisis, a relative housing market slowdown is likely to continue.

Despite the average interest rate on mortgages decreasing, demand for mortgages has declined. Figures from the Bank of England show that mortgage approvals decreased from 46,200 in November to 35,600 in December.

And after a further drop in January, house prices fell for a fifth consecutive month according to research from Nationwide.

High interest rates are discouraging some buyers and forcing sellers to lower asking prices to compensate for higher repayments.

This trend has affected many parts of the UK, with a dip in average house prices after years of consistent growth.

How can landlords monitor inflation, interest rates, and house prices?

Challenging economic conditions, including rising energy bills and high prices for fuel and materials, mean it’s important that landlords attempt to keep their costs down.

Managing higher interest rates

With interest rates no longer at a record low, what can landlords do to keep mortgage costs under control?

  • shop around for the best mortgage products – you may have to switch lender but it could be worth it financially
  • look for fixed rate deals of two or five years as the base interest rate is likely to keep rising for the foreseeable future
  • work with a specialist buy-to-let mortgage broker – their knowledge of the market and strong relationships could save you a significant amount of money

Managing rising costs

Keeping costs down is tricky at the moment, but here are some practical things you can do to save money in the long run:

  • get a range of quotes for maintenance work – doing your research can increase your chances of working with reliable and affordable tradespeople
  • inspect your property regularly – picking up on small problems before they escalate could help you to make big savings on costly repairs
  • build relationships and communicate regularly with tenants – getting ahead of any problems such as rent arrears or unpaid bills can help you to minimise their impact

Monitoring house prices

Until mortgages settle at a more affordable rate, house prices could continue to fluctuate. Landlords should keep these things in mind when considering house prices:

  • take a long-term view – if the value of your property changes, it’s important to remember that it could increase over the long-term
  • is now a good time to buy? More expensive mortgages and lower demand means that property prices in some areas have dipped – this could give the buyer more leverage when negotiating a price
  • is now a bad time to sell? You might not get as much as you were expecting – but most landlords are still likely to make a profit when selling if they’ve owned the property for a while

What do landlords need to keep an eye on in 2023?

With further changes to house prices, interest rates, and inflation expected this year, here’s what landlords need to consider when making important decisions:

  • think about how your monthly costs could be affected by inflation and interest rates, and work out where you can save money
  • if you’re buying a property or remortgaging this year, take the time to decide what type of mortgage product works for you
  • although the property market remains stable, average prices in some areas have dipped recently. Landlords will need to take these trends into account when making any major decisions in 2023

Useful guides for buy-to-let landlords

Are you concerned about the impact of rising inflation and interest rates on your rental property business? Let us know in the comments below.

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Zach Hayward-Jones and Conor Shilling

Zach is a writer for Simply Business that specialises in covering breaking news and government updates.

Conor has worked as a professional writer for 10 years, specialising in the buy-to-let market, landlords, and small business finance.

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