It is a modern day dilemma but the Government of the day needs to keep the housing market buoyant, while trying not to jeopardise their own inflation target. In a bid to keep inflation down and reach their inflation target, interest rates sometimes need to be put up to slow rising inflation. However, in doing this the cost of buy to let mortgages increases, This can have a negative affect on the buy to let market and the number of investors deciding to take out a buy to let mortgage. Property prices can be greatly impacted when interest rates go up. Many landlords may be put off from making an investment decision, if they keep hearing about the worries and risks of rising interest rates.
Mortgage borrowing is highly dependent upon interest rates money markets, as well as market perception. The U.K.'s credit rating strongly impacts lenders ability to access wholesale markets. This in turn may dictate the size of the deposits landlords are going to need find future - as lenders become more cautious and choosy about who they lent money too. During times of stable interest rates, the market has a high degree of certainty. Any unexpected changes are likely to cause shocks amongst mortgage lenders. Sometimes the money markets even change that wholesale prices in expectation and anticipation of an imminent announcement from the Bank of England's, Monetary Policy Committee (MPC).
During these times of benign stability, buy to let mortgage borrowing has in the past, risen to record levels. Prior to the credit crunch, many hundreds of thousands of amateur landlords had no problem accessing buy to let mortgage finance. Many were riding on the speculative property investment bandwagon. Likewise first time buyers desperate to scramble on to residential housing ladder enjoyed relatively low interest rates for a decade. Yet the credit crunch changed everything. For the first time in a generation, an economic situation was created in which, (despite the desperate efforts by sovereign nations to stimulate growth through ultra low interest rates), landlord investors cannot access mortgage finance.
As property prices wobbled, it has pushed some landlords who previously 'stretched themselves' and borrowed too much, into risky territory. It now means that even the slightest interest rate rise in future can push many landlords investments into negative equity. Many may struggle to service a more expensive monthly mortgage repayment with the rent they receive. It appears that U.K.'s growth prospects are once again heavily interlinked with the property market, and in particular speculative investments by landlords in the rental sector. Yet mortgage lenders have tightened up their qualification criteria for new landlord lenders. The number of mortgage approvals has decreased dramatically, as underwriting policies have become stricter and less free flowing.
Yet the outlook for rental property investment in the UK is not all bad news. Despite the risk of interest rate rises on landlord profitability, the general supply of housing stock in the UK has dramatically failed to keep up with increased demand from prospective tenants. In particular the influx of economic migrants, coupled with the a large increase in the number of single people seeking flats and apartments - has continued to sustain property prices.
The future economic prospects for landlords seem uncertain. On the one hand the level of demand for rental property is strong, while available land continues to be tied up in local authority planning bureaucracy. On that other hand, the cost of mortgage finance continues to be severely restricted, and only accessible to landlords who have large equity stakes in their property portfolio.
Another challenge for existing landlords is dealing with new regulatory guidelines (such as the Rental Deposit Scheme, Tenancy Deposits Scheme and HMSO regulations). Some of these regulations are forcing landlords to invest money in adapting existing properties for tenants to live in a safe and reasonable fashion. These unforeseen costs may marginal impact overall profitability for landlords. These are just examples of additional unforeseen costs of property letting, that may make landlords think twice before applying for a new buy to let mortgage.