The Worst of Times: Are Landlords in the Eye of a Perfect Storm?
The perfect storm: Can landlords withstand the mortgage mess?
The UK is in economic turmoil, and the property industry is being hit hard. Interest rates and energy bills are up. And understandably, a lot of landlords are getting flashbacks to 2008’s financial crisis and wondering if they can weather this latest storm too.
There is much to think about, from how to cover increased mortgage payments to how to afford the energy efficiency upgrades stipulated by changes in legislation.
We had a chat with Stephen Smith, a non-executive director and consultant in financial services, with 40 years of experience in the mortgage industry. He delivered some crucial insight and advice on landlord survival in these times.
His deep dive into the current economic instability was part of our 4th November Mashroom Show, and you can watch the replay here.
Millions of landlords facing ‘shock point’
‘According to the Bank of England, 83% of all borrowers are currently on some form of a fixed-rate deal,’ Stephen says. ‘1.8 million of those deals are due to end in 2023. So a huge number of people are going to be reaching that sudden shock point of having to pay dramatically more on their repayments within the next 18 months.’
According to the Telegraph, over half of all landlords will be coming to the end of their fixed deals by the end of 2024, and if their new deals are just 4% age points higher than their current deal, 38% will find their current property becomes either unmortgageable or makes a loss.
How did we get here?
‘The fundamental issue is the lack of supply – a lack of good quality, affordable housing that people want to live in,’ Stephen says. ‘As a country, we simply haven’t been building enough homes – not just in the last few years but frankly for decades.’
It’s a simple, inevitable mechanism, Stephen explains:
When supply is constrained and demand continues to rise, prices have to go up.
And the historically low interest rates of the past fifteen years have played their part too, he says: ‘That’s led to homebuyers being able to borrow more. And that in itself has been a further stimulus to property price rises. Borrowers have to save more for a deposit and borrow much more.’
The result of the supply/demand imbalance is people can’t buy homes like they’d like to. ‘Many households are trapped in the rental sector, unable to save for a deposit because of the high level of rents. Survey after survey shows three quarters of people want to buy their own home, but the reality is nowhere near that level.’
Ghosts of crises past?
Back in 1979, the UK saw its highest base rate ever of 17%.
It was 15% in 1991, and these figures make today’s rate rises look puny by comparison. But is there more to it than numbers? We asked Stephen how this crisis compares to decades past.
- Lenders’ reactions are dramatically different to 2008. ‘Lenders are currently very keen to lend,’ Stephen emphasises. ‘This isn’t like 2008/2009 when lenders didn’t particularly want to lend.’
- The 1990s – a very different world. Stephen illustrates this with some figures: ‘Back in 1990, the average household annual income in the UK was around £20,500 and the average house price was about £58,000 – that’s 2.8 times the annual income. But by 2020, the average house price was £238,000, and the average household income had only risen to £37,100. So you’re looking at the house being 6.4 times the income. That’s an immense increase, made affordable by the ultra-low interest rates we’ve had.’
- And the 1980s – infinitely worse? ‘Back then, literally all mortgages were on variable rates. There was a time in 1980 when interest rates rose 2.5% overnight – literally overnight. The monthly payments weren’t even enough to cover the interest, so the mortgage term went ‘infinite’. But now, with so many mortgages being on fixed rates, the pain of rate hikes unwinds over time, when a deal expires and you have to refinance.’
The perfect storm
So, some horror stories from the past may haunt landlords who have long memories, but is this current situation worse? ‘Things are getting almost as bad as I’ve ever seen them in my long years in this industry,’ Stephen says.
I’ve seen a number of people saying, ‘Well, when I was a first-time buyer I had to pay 15%, so why are you complaining about 4.5 or 5%?’ The truth is, property prices and the amount borrowed have both risen hugely, and an interest rate of 4% today is the equivalent of a 14% rate back in the day, so that’s actually what all the fuss is about.’
Stephen thinks we’re in a perfect storm. Higher mortgage payments for those in owner-occupation, and higher rents where landlords will have to put up rents to face their higher mortgage costs, plus the rise in fuel costs and food costs.
But there are a couple of saving graces, according to Stephen:
- Stress testing. ‘All borrowing done in the past eight or nine years will have been stress-tested.’ In essence, this means that the lender will have checked that the deal would be affordable for the borrower even if the interest rates went up. ‘So borrowers should be able to make their monthly repayments without going into arrears, but of course, the cost-of-living crisis is adding significant pressure.’
- The employment picture is different. ‘We actually currently have very low unemployment, unlike the mass unemployment that we had back in the early 1990s. Back then, people were made redundant and many had to give up their homes.’
EPC upgrades: Could lenders ease the pain?
As a further squeeze on landlords’ pockets, new legislation will be increasing the minimum Energy Performance Certificate (EPC) rating.
Stephen believes it’s in lenders’ interests to help out with this pressure. ‘I think overall we’d all agree better energy efficiency is a good thing, but one problem is that there’s a disparity between what experts recommend spending on a property and what landlords are expecting. It’s already having an impact, and already reduced numbers of rental properties coming to market, which is the opposite of what’s needed, given the skyrocketing demand.’
‘I think this issue has to land on the shoulders of lenders. They have a real incentive to get this going. Statistics show that something between a quarter and a third of all buy-to-let mortgaged properties have an EPC lower than C, so that’s huge numbers for each lender. Lenders should be falling over themselves to lend. But it comes down to education and communication, and I’m still also seeing surveys of landlords – albeit small numbers – who aren’t aware of the requirements to improve their properties. So education and communication are needed. But landlords also need to wake up and take action.’
How landlords can weather the economic storm?
Stephen has two key tips for landlords today:
- Don’t rush. ‘If you rush into something, you may lock into a rate with a lender that has penalties attached, and you may regret it in a couple of weeks’ time,’ Stephen says. ‘The market is moving very fast, and until it settles again, at hopefully a lower level, you may rush in and secure something that you regret, so don’t rush, if you can avoid it.’
- Talk to a broker. ‘I have never seen a more complicated market,’ Stephen says. ‘You really do need advice, and that’s where talking to a good broker will pay dividends. They’ll give you the best market view and they’ll know how to secure the best deal with the relevant lenders that they select for you.’
‘The mortgage market is remarkably flexible in amending itself and providing the finance that people need, so that’s one glimmer of light,’ Stephen concludes. ‘We will find a path through.’