Understanding the Impact of Interest Rates on the Rental Market


Interest rates have played a significant role in shaping the dynamics of the rental market. With approximately 11 million mortgages in the UK, accounting for around 16.5% of the population, the recent rise in interest rates has had far-reaching consequences.


In England alone, where 65% of properties are owner-occupied and 17% are social housing, the remaining 18% reside in the private rented sector. As two-thirds of landlords in England have mortgages, the fluctuation in interest rates has had a substantial impact on the rental market.


The Bank of England's base interest rate has surged from 0.1% in March 2020 to 5% in June 2023, marking a 5,000% increase. This has had a direct effect on mortgage rates offered by lenders. Prior to the rate rises, the average two-year fixed mortgage rate in March 2020 stood at 2.43%. Presently, it has soared to 5.23% and is expected to rise further.


Landlords who previously paid a monthly mortgage payment of £500.00 now face a staggering increase to £1,576. Consequently, many landlords find that their rental income falls short of covering mortgage payments. A 2-bedroom flat in West London rented for £1,500.00 would no longer cover the mortgage expenses based on the above example.


While landlords cannot increase rents by 215% to compensate for the surge in mortgage payments, some have incrementally raised rents. However, these increases have typically remained below 30% and have failed to bridge the gap created by the significant mortgage payment increase.


The rise in interest rates over the past three years is not the only thing that has contributed to an increase in rents. Factors such as Section 24 legislation (interest payments cant be written off as an expense), stricter regulations for private landlords, and the potential cancellation of section 21 and non-fault evictions have added pressure on landlords. Consequently, many landlords have decided to sell their properties and leave the rental market.


However, the sale of properties does not translate to an increased supply of properties hance an increase in home ownership. Demand continues to outstrip supply, particularly in London, where international investors consider property a safe (and inflation resistant) investment . Moreover, the shortage of housing is further exacerbated by the fact that Britain currently faces a backlog of 4.3 million homes, a deficit that would take at least 50 years to fill at the current rate of construction.


Looking ahead, rents are expected to continue rising as landlords grapple with increased mortgage costs. Tenants have witnessed substantial rent increases in recent months, but there are limits to how much they can afford. Many tenants are either relocating to more affordable areas, downsizing their accommodation, or seeking shared housing arrangements with friends or family.


The rise in interest rates aims to control inflation. However, inflation in the UK is primarily driven by external factors, such as escalating energy costs and rising import prices. Additionally, the impact of interest rate increases is delayed as borrowers on fixed-rate mortgages are not immediately affected.


The rental market is undergoing significant changes due to interest rate fluctuations. It is essential for tenants and landlords to recognize the challenges they face and work together to advocate for policies that strike a balance between their interests. By fostering collaboration, tenants and landlords can create a sustainable rental market that benefits both parties in the long run.


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