How will the base rate increase affect your landlords?

15 May 2023

The base rate has increased again to 4.5% - but what does this mean for your landlords and supply in the private rented sector?

The base rate has increased from 4.25% to 4.5% - the 12th increase in 18 months. The base rate is what banks across the UK use to set their interest rates on borrowing. This therefore affects mortgage interest payments for property owners - including landlords. The higher the base rate, the more money landlords and homeowners hand over to cover their mortgage interest rate costs. 

How will the increase affect mortgage payments?

Buy-to-let investors on fixed-rate mortgages normally have a two or five-year agreement. That means that, until their agreement ends, they're safe from any price increases.

The current average mortgage rates aren't expected to jump drastically with this new announcement as this increase will have already been factored in, according to industry experts.

However, the average rate for a five-year fix was 3.17% in May 2022, and that has since jumped to 4.97% in May 2023. That's a large difference for landlords to absorb when they come to remortgage.

Any landlords currently on a tracker or variable mortgage will be affected more quickly as they are directly affected by any changes to the base rate. Approximately 1.1 million people in the UK are either on a base-rate tracker or discounted-rate deal. Around 1.1 million more are on the standard variable rate (SVR) of their provider.

What types of mortgages are landlords now choosing?

New research shows that over three-quarters of landlords plan to choose a fixed-rate plan when they remortgage.

However, the number of landlords saying that they would choose a tracker mortgage is creeping up, in anticipation of the base rate dropping again in the near future.

Seventeen percent of respondents said they'd consider a variable tracker rate, and 6% would consider a standard variable rate - a big jump on zero in August 2022.

The length of fixed-rate mortgages that landlords are choosing reflects this trend further. Twenty-four percent of landlords are now considering shorter two or three-year fixed rate deals - up from 13% in last year's survey.

When will the base rate come down?

The base rate hinges on the rate of inflation - the rate at which the average cost for standard household items is rising. If that rate slows, base rates are more likely to drop. However, it won't be immediate.

Forecasts predict that rates will peak at 5% in August 2023, and will then come down over the next few years.

What's been the impact of the changes to section 24 on mortgage interest payments?

The changes to section 24 mean that property investors can now be taxed even if their property is operating at a loss. 

In a scenario outlined by Hamptons, an "average higher-rate tax paying landlord" on a 6% mortgage would be able to turn a profit of approximately £695 if they could still deduct finance costs before tax. Instead, they're now faced with an £850 loss per year.  

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How will this affect the supply of buy-to-let properties?

Hamptons data shows that younger investors - that tend to maximise their borrowing to afford a buy-to-let property - will be harder hit than older landlords when the base rate is increased.

As older landlords leave the market, this suggests that new, younger landlords may struggle to get their foot in the door. Combined with the impact of section 24 affecting the profitability of properties, this will likely have a detrimental effect on the stock of private rental properties on the market.

Research commissioned by the National Residential Landlords Association (NRLA) found that a third of private landlords in England and Wales planned to cut the number of properties they let. Only 10% said that they'd plan to increase the number of properties they rent to tenants.

Only time will show the true long-term impact on landlords of the fluctuating base rate and unpredictable mortgage costs. 

For a better understanding of what's encouraging landlords to leave the sector - and solutions for the government - read our 10-point plan in Renting Done Right

Further reading