Renters and buy-to-let investors could be strongly hit by rising mortgage rates, with potentially serious impacts on the availability of homes to let, a committee of MPs has heard.
The Treasury Committee heard evidence about the potential impacts of rising mortgage costs for mortgage holders and renters.
Mortgage rates increased sharply amid market turmoil following the mini-budget and many products were pulled from sale.
Rates offered on home loans have been on the rise generally in recent months, following a string of Bank of England base rate hikes.
I think there are potentially implications there in the medium term for the sustainability of the buy-to-let market— Chris Rhodes, Nationwide Building Society
Chris Rhodes, chief finance officer at Nationwide Building Society said the buy-to-let sector had been particularly hit, meaning that: “It’s marginally profitable for new buy-to-let investors if not loss making to take on board a new property, so I think there are potentially implications there in the medium term for the sustainability of the buy-to-let market.”
Ray Boulger, senior mortgage technical manager at broker John Charcol added: “I think the buy-to-let market is where we’re likely to see a lot more stress than the residential market.”
Joanna Elson, chief executive of the Money Advice Trust, said: “And of course, the impact of that is on renters.”
Ms Elson said people’s homes tend to be “the last thing they give up”, so they cut back on other outgoings to keep the roof over their heads.
Mr Boulger said: “What we’re seeing now is criteria changes and we’re finding situations where clients are not able to proceed with the amount they originally planned to borrow because of criteria changes.
“It’s not all about rate, it’s rate and criteria, particularly stress test rates, they’ve been changed as a result of rates going up.”
Stress tests look at how affordable mortgage payments may be for borrowers in the future.
Mr Boulger continued: “When you factor in the other impact of energy price increases and cost of living increases that can have a significant impact on what people can borrow.”
He said the stress rate is “particularly a problem on buy-to-let”.
Referring to landlords, he said: “If you need a mortgage and you need an LTV (loan-to-value) anything above 50% or 60%, with the current stress rates it’s going to be very difficult.
“And the knock-on effect of that, combined with some existing landlords selling because of the more onerous tax regime and other regulatory requirements and higher mortgage rates I think is going to have a quite serious impact on the availability of rental property over the course of the next year or two.”
Discussing the aftermath of the mini-budget, Charles Roe, director of mortgages at trade association UK Finance, said: “Products were available. But lenders were also dealing with a large number of phone calls and requests that came in from borrowers who were concerned about their finances, would they be able to re-mortgage.
“But throughout that period, lenders were offering follow-on products to those borrowers that came to the end of a fixed-rate product.”
He added: “We’re seeing the markets return to much more stability over the course of the last two to three weeks. As a result of that, swap rates (which lenders use to price mortgages) have come down and in turn lenders are reducing their mortgage rates.”
Explaining why bonds or gilts have an impact on the mortgage deals that lenders can offer, Mr Rhodes said: “When the yield on long-term gilts, so the yield on five-year gilts, goes up, the swap curve goes up, and the cost of hedging a five-year fixed-rate mortgage goes up.”
Asked if this feeds directly through to mortgage prices that can be offered, he said: “We estimate the business we’re going to write in the next two working weeks, 10 working days broadly, we book those hedges into the market so we have a financial commitment to those hedges, and that’s what’s used to support the mortgages.”
