With tenant redundancies on the increase and an oversupply of property causing a dip in rents, the UK's buy to let landlords have been hit hard by the economic downturn. Just over half are on variable and tracker rate mortgages and would have been struggling to meet repayments six months ago, until they were given a reprieve by consecutive interest rate falls resulting in a substantial improvement in their net income. However, they will again face more difficult times ahead when the cost of borrowing starts to rise. Buy to let landlords are traditionally highly leveraged and many who have been on fixed rate deals will now find that their equity has been eroded when they come to remortgage this year or next, leaving them at the mercy of their lender's SVR (Standard Variable Rate).
Although some will have prudently saved the additional income, enabling them to service any future void periods and build up a pot of cash as a buffer for when mortgage costs increase, a large number will have been forced to divert a proportion of their rental income to service other commitments, such as alternative buy to lets and even their own owner-occupier mortgage.
Nick Hopkinson, Director of Property Portfolio Rescue, comments:"Landlords are experiencing falling demand and an increase in void periods, but those on tracker and variable rate deals have been given a reprieve by falling interest rates, and are enjoying a period of strong positive cash flow. Interest rates will not stay at this level indefinitely, however, and when borrowing costs increase again, as they undoubtedly will, investors will find themselves trapped and with insufficient equity remaining to remortgage.
"This ticking time bomb could prove disastrous. Cash flow presents the biggest risk in property investment and landlords must act now rather than be lulled into a false sense of security, in the hope that the market will bounce back. Wise investors will act cautiously over the coming months while rates remain low, taking advantage of a temporary boost in income to bolster their cash reserves. Interest-only mortgage borrowers might consider making overpayments to reduce their debt, increasing equity and improving their chances of qualifying for a good fixed rate deal when interest rates start to rise."
