What do inflated mortgage rates mean for landlords and tenants?

Chaos in the mortgage market isn’t just bad news for traditional homeowners - landlords and tenants are also feeling the knock-on effect of the government’s mini-budget as buy-to-let rates soar.

After the government’s controversial mini-budget in September, some of the UK's biggest lenders reacted by taking their deals - including buy-to-let mortgages - off the market. 

While mortgage deals are now returning, average rates are much higher than before. But with predictions that rates won’t fall to more normal levels until April 2023 at the earliest, what do current inflated mortgage rates mean for landlords and tenants?

What’s happening to buy-to-let mortgage rates?

The dramatic drop in the value of the pound following the mini-budget in late September led to expectations that the Bank of England's base rate would increase more steeply than expected. Faced with the prospect of higher costs, banks and building societies withdrew hundreds of mortgages. 

Moneyfacts says the number of buy-to-let mortgages on the market more than halved from 2,075 on the day of the mini-budget (23 September), to just 988 on 1 October. While deal numbers have recovered somewhat since then, there are still fewer deals than there were before 23 September, resulting in far less choice for landlords looking to take out a mortgage.

Landlords who are either looking for a new buy-to-let mortgage, or who need to remortgage after coming to the end of a fixed deal, will face significantly higher rates compared to earlier in the year. 

According to Moneyfacts, average rates for two-year fixed-rate buy-to-let mortgage deals shot up from 4.97% on the day of the mini-budget, to 6.77% by 26 October. Five-year fixes increased by a slightly smaller amount, rising from 5.19% to 6.71%. These rates could rise even higher, thanks to the recent base rate increase on 3 November. 

• Find out more: buy-to-let mortgages explained

Could landlords start to sell up?

A potential consequence of rocketing buy-to-let mortgage rates is seeing an increasing number of landlords choosing to sell their properties and exit the rental market altogether. 

But there's already a chronic shortage of rental property. According to Rightmove, demand from renters is up 20% compared to 2021.

Oli Sherlock, landlord and director of insurance at rent technology company Goodlord, says his biggest fear is where the next wave of property is going to come from if the rental market stagnates and more homes aren't built soon. He believes we will see declining landlord numbers over the next 12 to 24 months and rents continue to rise. 

Sherrelle Collman, managing director of Caridon Landlord Solutions, agrees: 'As it stands, there is very little benefit to being a small portfolio landlord, and yet their investments account for the vast majority of properties in the buy-to-let sector. If we lose even 25% of those landlords - which is more than likely - then it is tenants who will suffer. Fewer properties, less choice, higher competition, higher rents.'

• Find out more: selling a buy-to-let property

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Will we see further rent rises?

For landlords that don't sell up, increasing the rent they charge is another option to balance their books.

Rents, however, are already high across the country. Stats from property site Rightmove show the national average asking rent outside of London is £1,162 per month - up 11% in a year, and up 3.2% just since July 2022. In London, the stats show rents have risen 16% in the last year, with tenants paying an average of £2,343 per month. 

Collman says her company has seen a significant increase in landlord clients coming to them with concerns about their tenants’ ability to pay rent. 

Worryingly, she'd also heard instances of tenants who are in receipt of Universal Credit (UC) cancelling their Alternative Payment Arrangements (APA). APA allows tenants to have the housing element of their Universal Credit payment sent directly to their landlord, helping them to better manage their budget. Cancelling it could indicate struggles to pay for other essentials.

Given how much people spend on their rent, it's perhaps no surprise many tenants are struggling. Recent findings from Zoopla that showed the average single earner can now expect to spend 34.4% of their income on rent. But according to the ONS, a property is deemed affordable if rent makes up 30% or less of a household's income. 

In London, the situation is even more dire - the ONS data found that households are spending 40% of their income on rent, making the city unaffordable for most tenants. 

With this in mind, it's hard to see how renters will be able to foot the bill for mortgage hikes.

What to do if you can't pay your rent

During the fixed term of a tenancy agreement, your landlord can’t increase your rent unless there is a rent review clause allowing for this. This clause will lay out when and how the increase will be made, so check through your contract carefully,

If you are worried about paying your rent, or you've missed a payment, you should contact your landlord or letting agent straight away. Missing a payment is called ‘rent arrears’, and if the payment issue isn’t resolved then you may face eviction.

As well as talking to your landlord about a possible repayment plan, you could get government help from the Debt Respite Scheme - also known as Breathing Space. 

If you're approved, your creditors (in this case, your landlord or letting agent) won't be able to take enforcement action (such as eviction) against you for 60 days, which will hopefully give you time to catch up on your payments. StepChange has further details on how the scheme works.

In Scotland, you can apply for a 'moratorium', which offers protection from legal action over unpaid debts for six weeks.

You can find out from Citizens Advice how the eviction process works in the event of rent arrears, as well as other general advice on debt and budgeting. 

Charities StepChange and the National Debtline can also help. For support and advice on housing, contact Shelter.

• To find out more: what to do if you can’t pay your rent