Landlords face mortgage squeeze as borrowing costs rise

UK landlords are facing increasing financial pressure as borrowing costs rise, driven by a combination of political uncertainty, inflation concerns, and energy price shocks. This squeeze on mortgage affordability is expected to influence decisions around remortgaging, property sales, and new purchases throughout the year.

Rising Borrowing Costs and Market Uncertainty

Tom Bill, head of UK residential research at Knight Frank, highlights that higher borrowing costs, alongside energy price pressures and political uncertainty, are placing fresh strain on the housing market. He emphasises the critical role of government policy, stating, “The key issue for the property market is what a new Chancellor would mean for inflation.”

The 10-year yield on UK government debt has recently surpassed 5%, reaching levels not seen since the global financial crisis of 2008. This increase has been partly driven by inflationary concerns linked to the conflict in the Middle East, which has caused energy price shocks and left the UK vulnerable to further price rises.

Political Factors Driving Market Volatility

Mr Bill points to investor anxiety over the possibility of a Labour government adopting a more left-leaning agenda than the current administration under Sir Keir Starmer. A leadership contest within Labour could result in a government with looser spending plans, higher borrowing, and consequently, greater inflation risk.

Such inflation expectations tend to push up swap rates, which lenders use to price fixed-rate mortgages, thereby increasing borrowing costs for landlords and buyers alike.

Impact on House Prices and Transactions

As borrowing costs rise, Knight Frank has downgraded its house price forecasts across all UK markets. Mr Bill explains, “If borrowing costs continue to rise, it will dampen prices and, to a lesser extent, transaction volumes.” He adds that buyers and sellers face a strategic decision about whether to act now or wait until autumn, reflecting the uncertainty in the market.

This outlook aligns with findings from the latest RICS UK Residential Market Survey, which suggests that “muted conditions are likely to persist over the coming months.” The prospect of another tax-raising Budget further compounds the pressure on the housing market.

Political Ambitions Versus Market Realities

The tension between political ambitions and the realities of debt markets has become increasingly apparent. Mr Bill observes, “We have seen the gap between political ideology and the hard-headed reality of debt markets.”

Paula Barker, an MP supporting Andy Burnham for the Labour leadership, has stated that “markets will have to fall in line.” Mr Bill critiques this stance, likening it to “a homeowner asking their mortgage lender to fall in line,” underscoring the limited influence political rhetoric has over financial markets.

What this means for landlords

For landlords, rising borrowing costs mean tighter margins and increased scrutiny when considering remortgages or new property investments. The combination of higher mortgage rates and political uncertainty suggests a cautious approach may be prudent, with many landlords potentially delaying decisions until market conditions become clearer.

Moreover, the dampening effect on house prices and transaction volumes could impact portfolio values and liquidity, requiring landlords to carefully assess their financial strategies amid this evolving landscape.

Source: Based on reporting from Property118

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