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Tenants are stuck in a financial “pain point” as rates peak in the UK, senior bankers privately admit. Evidence of this may emerge in half-year financial results from high-street lenders this week. But the pain has already started for one acquaintance.
Dan, a 23-year-old fan of poetry and punk rock, is attempting the tricky alchemy of turning a Covid-era arts degree into decently paid employment. He still spends one day every week applying for jobs and four days working in a shop. What has changed is that he now also spends his weekends toiling behind a bar.
It is the only way to cover a steep increase in the rent on his bedsit.
Dan is a recent recruit to Generation Rent, defined as younger Britons who have been priced out of the housing market and are paying a substantial percentage of their income in rent. This group is particularly exposed to higher rates. They tend to occupy properties owned by private sector landlords.
The issue here is buy-to-let mortgages. The owners of 2mn private rental properties depend on these loans. Most are interest-only. That means borrowers cannot reduce repayments to cover higher interest charges as most owner-occupiers can.
The servicing cost of a buy-to-let mortgage has doubled since the Bank of England began rate rises at the end of 2021. It now stands at 6.8 per cent for a typical five-year fix, according to Moneyfacts.
That is a big hit for buy-to-let landlords when they remortgage. They will try to pass some or all of it on to tenants.
The cost of renting private accommodation rose to 5.1 per cent in the 12 months to June. But the increase for new lets is over 10 per cent annually, according to industry surveys. That is a steep increase when up to a third of your income covers rent of more than £1,000 a month, as it does for most tenants in England. It is also bang in line with retail price inflation.
The BoE is alive to the problem. In its recent financial stability report, the Old Lady predicted financial stress would rise alarmingly in the sector.
The crucial metric here is the interest coverage ratio, which expresses rents as a percentage of interest charges. A landlord generally needs a predicted ratio of more than 125 per cent to get a buy-to-let mortgage. Fall under this level afterwards and arrears, defaults and repossessions are likely.
The BoE reckons that, all things being equal, the proportion of buy-to-let landlords dropping below the threshold will increase from 3 per cent to just over 40 per cent by the end of 2025. That would equate to 800,000 tenanted properties under pressure.
Landlords are already bailing out. There were about 100,000 net sales of buy-to-let properties in 2022. The number of UK homes available to rent has plummeted to a 14-year low.
“Landlords are selling up because their sums do not add up,” says Ray Boulger of mortgage advisers John Charcol. “That is putting upward pressure on rents.”
The litany of woes facing Generation Rent requires qualification. First, big lags are built into the transmission of higher rates to tenants. BTL mortgages are refinanced in dribs and drabs. No debt cliff edge looms and tenant wages are rising healthily. Arrears on BTL mortgages are historically low at 0.78 per cent of the total. Inflation, interest rates and mortgage costs may be on the way down.
Second, in England BTL landlords are theoretically prevented from increasing rents above local market prices. These are set partly by mortgage-free landlords, who are less sensitive to interest rates.
Third, the predictions of the BoE are often wrong.
Readers as old as me may grumble “why has he gone all millennial on us?” If you have paid off a mortgage, or are close to doing so, the hardships of twentysomethings may be deemed character-forming rather than lamentable.
This would be wrong. Renting suits some people. My personal experience was that it sucked. You lack control and build no equity. Renting sucks even more if it is your only option and you can barely afford it. It sucks thricely if hefty increases are not just the result of higher base rates.
If the rental crisis deepens, the oddities of the UK mortgage market and the failure of government to expand housing stock will also be to blame.
This week, banks will talk a lot about helping mortgage borrowers. Tenants are just the customers of those borrowers. They can only hope that some of that help is passed on.
jonathan.guthrie@ft.com
