Landlords, it's time to build your reserves.By Mark Long
In many ways, there's never been a better time to be a buy-to-let landlord.
Rental yields are strong, tenant demand is high, arrears and voids are falling and after a period in the doldrums, most portfolios are gaining real capital value. So what’s been keeping landlords awake at night? Are landlords worried about the prospect of a rise in BTL mortgage interest rates?
To provide some context, three-quarters of landlords borrow to fund their property portfolios. In our most recent Landlords Panel survey, the typical borrower had six individual BTL loans with an average of four different lenders.
We asked over 1,000 landlords how confident they were that they could meet their repayment obligations if rates rose from 0.5% through to 3.0% in 1/2% increments.
The vast majority of BTL borrowers told us rises of 1.5% or less would be of relatively minor concern; but at 2.0% or more, repayment confidence begins to erode rapidly.
At a 0.5% rise, over four-fifths were ‘very confident’ that they could meet their repayment obligations. At 2.0%, however, this figure had dropped sharply to only half and by 3.0%, nearly 1 in 5 were ‘not at all confident’ that they could meet their mortgage repayment obligations.
We asked landlords to tell us what the actual impact of a 2.0% rate rise would be. For most, the impact could be absorbed but with a detrimental impact on profitability. However, many felt there would be some serious fall-out.
A quarter told us they would have to increase their rents to re-coup costs, which would spell bad news for tenants. 16% would re-mortgage to products with a better rate or longer term. Most seriously, however, another 16% said they would struggle to absorb the increase and would potentially leave the sector entirely. The study found that those medium sized landlords with 11-19 properties felt most at risk of business failure.
Given that there's never been a cheaper time to be a BTL borrower, landlords should be thinking now about building up their reserves as protection against potential rate rises.