Rising Interest Rates and the Rental Market

Rising interest rates are a hot topic right now and not just in financial circles. Everyone is talking about the issue, its effect on the economy, on business and on household budgets. The impact on the property market is likely to be significant with the effects felt by homeowners, landlords and tenants.

While headlines often focus on the effect on homeowners, it’s worth knowing that more than sixty percent of landlords have mortgages on the properties they let. Of those, around half have mortgages amounting to more than 50% of the property value and will be most affected by interest rate hikes.

Landlords with variable rate mortgages won’t be the only ones facing higher costs. Those on fixed-rate deals which are coming to the end of their term will be faced with steep increases in their monthly payments. Although the specific terms of a tenancy agreement might limit the scale and frequency of rent increases, many landlords will have little option but to pass on their increased costs to their tenants in the form of higher rents.

For the tenant already trying to cope with wider cost-of-living issues, a rent increase will be unwelcome. But if they try to find another rental property, they may find their options limited. The interest rate rises are having a widespread effect. An article recently published by Foxtons stated that the average rent in London is now more than £600 per week, a significant increase over the last 12 months.

In addition to the direct effects, rising interest rates will have an indirect impact on the rental market. By making property ownership less affordable, more people will make the decision to rent, piling further demand pressure on an already limited supply of rental properties. Every single agent we speak to now mentions the lack of stock as their number one issue. Tenants are staying longer, and landlords, feeling financial pressure and concerned about new legislation, are reassessing their portfolios.

With the costs of buying or renting rising, there could be a reduction in the number of people moving house. With reduced turnover in the rental market, landlords won’t need to lower their rents to attract new tenants. They’ll be able to push them higher.

Here are some insights from Zoopla:

  • Rents in the UK have been rising for the past few years. This trend is likely to continue, with average rent predicted to increase by 10% in 2023.
  • Rising interest rates are likely to put upward pressure on rents. Landlords typically borrow money to finance their properties, and when interest rates rise, their costs increase.
  • Rising interest rates could lead to a decrease in the number of landlords. Some landlords, unable to afford the higher costs of borrowing, may be forced to sell their properties, reducing supply and putting upward pressure on rents.
  • Rising interest rates could make it more difficult for tenants to find affordable housing. This could have a significant impact on low-income households and those who are already struggling to make ends meet.

The economic impacts of rising interest rates on the rental market are complex and far-reaching. We can’t predict with any degree of certainty the scale or duration of the impact, but we expect it to be significant.  Both landlords and tenants need to be aware of the potential impacts so that they can make the best possible decisions both for their current budgets and for their financial future.