Landlords stuck on variable rate mortgages are seeing their profits vanish as lenders increase their bills as much as five times in six months.
Cameron O’Dell*, 29, is seeing his buy-to-let margins get hammered because he is on SVR. “My mortgage lender has increased my mortgage rate five times since Christmas. Some of the letters telling me the rates are going up again have been less than two weeks apart,” he said.
Over the last six months, his mortgage rate has jumped by one percentage point. This means his monthly mortgage bill has increased by 20pc.
The monthly profit on his buy-to-let, which rents out for £600 per month, has fallen from £170 to £100.
The Bank of England has raised interest rates four times in total so far this year, opting last week to raise the Bank Rate by a further 0.25 percentage points to 1.25pc. Mr O’Dell has not yet been updated on the impact of this latest rate rise announced last week, which means his costs are likely to rise further.
“From an investment point of view, my profitability is becoming close to zero and my outgoings on the property could quickly exceed the income. I am close to the tipping point,” Mr O’Dell said.
“If I had more time on my hands, I would sell the property now. If interest rates keep rising, I could soon be at a loss, and if there is a recession and house prices fall off a cliff I could also lose out on the capital growth.”
Mr O’Dell is an accidental landlord who agreed a “consent to let” on his home in Nottinghamshire with his lender when his job took him overseas.
Because he has a consent to let, rather than a buy-to-let mortgage, Mr O’Dell cannot get a fixed-rate deal. This means his mortgage bill is likely to increase every time the Bank of England increases the Bank Rate.
Buy-to-let investors on standard variable rate deals will see the biggest drops in their profits as interest rates continue to climb.
Angus Stewart, of online buy-to-let broker Property Master, said the average rate for a two-year fixed rate loan of £160,000 with a 40pc deposit would cost a landlord £395 per month. “The same mortgage but on a variable rate was £661.” This is a jump of 67pc.
Landlords on SVR already have much smaller profit margins, meaning their business models are more vulnerable to rate rises.
Nick Mendes, of John Charcol mortgage brokers, noted the contrast between a fixed-rate deal and an SVR deal with one mainstream lender. For a landlord buying a £275,000 property with a 25pc deposit with a five-year fix, the rate is 2.78pc, meaning monthly repayments of £477.81. To borrow the same amount on the lender’s SVR deal, the rate is 4.49pc, meaning monthly repayments of £771.
“This is an increase of £324 per month and a reduction in net profit [assuming the house lets for £1,200 per month] of £294, before considering management fees etc,” said Mr Mendes.
Mr O'Dell added that soaring inflation and energy bills mean he is unable to raise the rent to offset his increased costs.
“I just tried to raise the rent for the first time in five years. I was only hoping to increase it by £40 per month, but I was hit by a bit of a barrage from my tenant and the answer was no. With the rising cost of living, it is very difficult to increase the rent without losing a tenant.”
Chris Sykes, of mortgage brokers Private Finance, said the rate rises, coupled with the Government’s plans to introduce new tenant protections, is putting the landlord business model at risk.
"I have seen several accidental landlords leave the market because it is no longer profitable and they are worried about about further rate rises eating away at their already slim margins once taxes are taken,” said Mr Sykes.
*This person’s name has been changed