Landlord mortgages: Our top tips to help combat rising costs

The current speedy mortgage rate rises have understandably come as a shock to some landlords. Whether you’re on a variable or tracker rate and have seen your monthly payments gradually going up, or you’ve come to the end of a fixed rate and are facing a sudden jump in the cost of your mortgage, landlords across the board are having their profits squeezed. And when you’re only able to increase rents once a year, that makes managing your finances very tricky.

As it stands, fixed mortgage rates are around the 6% mark and this rise has happened much more quickly than even the experts predicted. Back in 2021, the base rate was predicted to rise to 4%, but that was expected to happen over several years, not a matter of months. The most recent increase in June brought the base rate up to 5%, which was right at the top end of the latest predictions. This was driven by the fact that the rate of inflation is still at far too high a level (7.9% in the 12 months to May) and some politicians seem to have very few other ideas about how to bring it down, besides raising interest rates.

What are current forecasts for mortgage rates?

Most predictions are for rates to peak at around 6%, although some experts are suggesting they could go as high as 6.5%. However, the good news is that this is only likely to be a relatively short-term problem, as they’re forecast to come down again in 2024. That said, Buy to Let is typically a long-term investment and the current mortgage rates, which are around 6%, are actually about the long-term norm. 

So, if you feel your mortgage payments are too high, what can you do to reduce them?

1. Check what type of rate you’re on
   If you’re on a ‘Standard Variable Rate’, that’s typically the most expensive, so check what other types of rate you can get. The lowest you will probably be able to access are ‘tracker rates’, but these are likely to rise if the base rate continues to increase.

You could consider locking in a rate today that would ‘cap’ your mortgage costs over the next few years, although the savings you might be able to make will depend on how long you have left on your current deal and whether you have a repayment or interest-only mortgage. The best thing to do is speak to a specialist Buy to Let broker to talk through your options.

2. If you have a repayment mortgage…
   Speak to a broker or directly to your lender, as they may be able to increase the term of the mortgage or switch you to interest-only, which could make quite a big difference to your monthly payments.

For example:

• A £175,000 mortgage with a 65% loan to value over 25 years with a 6% interest rate = £1,132.49 a month
• If you extended the term to 30 years, it would reduce your monthly cost to £1,053.83, saving £78.66
• If you could switch to an interest-only mortgage, it would reduce your monthly cost to £878.85, saving £253.64

Please note that these are for illustration purposes and using rates at the time of publishing, which can change quickly. You should talk to your broker or lender directly to secure figures for your personal circumstances. If you would like to speak to an expert today, you can contact our partners, Embrace Financial Services, for a free initial consultation.  

3. If you have an interest-only mortgage…
   If you’re already on an interest-only mortgage it will be harder to reduce your costs. You may be able to access better rates simply through switching products with your existing lender, and if you have several properties a broker may be able to help reduce your mortgage costs across the portfolio.

Note: If you’re thinking of changing your mortgage, it’s important to check whether your rental income will provide enough cover versus the mortgage you need. If you’re a lower rate tax payer, you’re likely to need around 125%-130% cover at 7-9% mortgage rates; if you’re a higher rate tax payer, you may need around 145%.

4. Could you make a one-off payment to reduce your total borrowing?

If you can invest some capital to reduce your mortgage borrowing, that’s an easy way to bring down your monthly payment. For example, if you reduced your mortgage from £175,000 to £150,000, your interest-only payment would drop from £878.85 to £750 per month, saving you £128.85.

What else can you do?

If you’re currently letting a whole property to a single household, you could investigate your options for turning it into a House in Multiple Occupation (HMO) and letting it by the room, which could generate a lot more rental profit for you.

However, although you could get 2-3 times the rental income, it is a lot more work than a single let and you’d need to invest some money into getting the property legally compliant. Also:

• You may need planning permission for change of use
• You may have to make internal changes to the property
• The health and safety regulations – especially regarding fire safety – are more onerous
• You’re likely to need an HMO licence
• You’d need a specialist HMO mortgage

So it’s a significant undertaking, but it may be worthwhile for the additional revenue. 

If you already have an HMO, you’re likely to be paying the bills directly yourself and charging the tenants an all-inclusive rent. That means you’re probably feeling the pinch with the high cost of utilities and services, and particularly energy bills. So, it’s worth looking to see what savings you could make – e.g. if you have a smart meter installed, that will let you and your tenants see where and when costs are high, then you can talk to them about making an effort to reduce these.

Whether you’re letting a whole home or rooms, it’s well worth discussing with your tenants what rent increases they might be able to cope with. Let them know how much average rents have increased over the last year - by around 5% overall in the UK and by about 10% when it comes to new lets – so if your tenant had to move and begin a new tenancy, they could face a bigger increase in their rent that what you’re proposing.

Remember that Buy to Let returns come from capital growth as well as rental profits

Even if you’re struggling to make a reasonable monthly profit out of your property at the moment, check to see how much it’s grown in value since you bought it. Most properties have seen good capital growth over the past few years – on average sold prices in the UK increased by almost 30% in the 5 years between January 2018 and December 2022. So, look at the big picture because even if you have to put some money into your property to keep things ticking over right now, it could be well worth it in the long term.

Get help!

Try not to be overly worried by what you might see in the news – remember, headlines are designed to be attention-grabbing! What’s most important right now is to get qualified mortgage advice that’s tailored to your own circumstances.

“A lot of the landlords that we are speaking to are worried, but we are finding ways to help them and by the time we have discussed various scenarios, things are usually looking far more positive than they had originally feared.” - Matthew Lewis, Executive Financial Consultant, Embrace Financial Services

So, if you’re concerned about making your mortgage payments or if you’d like to chat through what options there might be for reducing your monthly costs, you can request a callback from one of the mortgage experts at Embrace Financial services via our website.