How Will Interest Rate Rises Affect the Rental Market?

In the wake of multiple interest rate rises by the Bank of England, shockwaves continue to be felt throughout the housing market. Fist-time buyers on the cusp of entering the housing market and homeowners considering taking the next step may have been put off by steep rises in mortgage rates. Equally, some homeowners will be facing the end of fixed term mortgages and panicking that they may struggle to meet a steep jump in their mortgage payments.

The Bank of England has stated that it had no choice but to raise rates in an attempt to curb record inflation levels amid a crippling cost-of-living crisis. However, there is no escaping the fact that this has had a significant impact on the housing market, and as the selling and rental markets intertwine, landlords and tenants alike will also be feeling the impact.

Pressure on an Already Crowded Market

Prior to the latest interest rate rises, the UK was already experiencing a surge in rental costs. In 2022, the average rental cost rose from £1,064 per calendar month in January to £1,175 in November, according to HomeLet Rental Index. This translates to an increase of 10% in under a year, a troubling trend that reflects the shortage of available rental properties in the UK.

With demand soaring, there is simply not enough housing to go around. The rising cost of living means that many individuals and families are not able to get onto the property ladder and are therefore forced to remain in rented accommodation for longer periods. The situation is worse in city centres, where demand far outstrips supply.

An Increase in Buy-to-let Mortgage Rates

Interest rate rises do not discriminate and landlords are feeling the pinch just as much as everyone else. With the majority of buy-to-let mortgages operating on fixed rate terms and the average interest rate on a two-year buy-to-let mortgage hitting almost 7%, the end of these terms poses a challenge that landlords will have to negotiate. Furthermore, many lenders have withdrawn a significant number of buy-to-let mortgage deals from the market, leaving landlords facing even more issues in finding a suitable deal for their circumstances.

In some cases, landlords will choose to pass on these costs to their tenants, driving rental costs up even further. It may not be possible for their tenants to meet these costs, however, potentially leaving landlords with vacant properties and no way of covering their outgoings.

The cost-of-living crisis has also led to an increase in maintenance and repair costs, with soaring energy prices adding fuel to the fire. The only other option for landlords in these circumstances is to sell up; a consequence which has further ramifications for the property market.

Even Less Choice for Tenants

With a shortage of rental properties available, landlords choosing to sell up will increase the pressure, leaving prospective tenants with few options. This will only contribute to rising rental costs and as tenants tend to have less disposable income and savings than homeowners, they may end up relying on credit and struggling to make payments.

The combination of all of these factors could leave many facing the prospect of homelessness. The UK government have been putting measures in place to support homeowners and avoid repossessing properties, but it remains to be seen whether these will be enough to avoid the potential crisis.

Added Downward Pressure on House Prices

The Covid-19 pandemic and temporary stamp duty holiday in 2021 contributed to a pronounced jump in house prices, with average house prices hitting a peak in August 2022. Since that point, prices began to decline and experts predict that they haven't yet bottomed out. If landlords take the step of exiting the rental market, this is likely to contribute to the fall in the average house price.

Last year property experts were already predicting a fall in the average house price, especially given the slowdown in the economy and rising levels of unemployment. While the focus has predominantly been on homeowners and how they will be able to manage higher interest rates on their mortgages, there is a secondary effect on the rental market.

With tenants and landlords alike battling with rising costs, the economic slowdown is creating rising uncertainty. As many factors influence the housing market, it's difficult to know what the repercussions will be and everyone will be hoping for the economy to stabilize as soon as possible.