Landlords face mortgage squeeze as borrowing costs rise

UK landlords are facing increased financial pressure as borrowing costs rise, driven by a combination of political uncertainty, inflation concerns, and energy price shocks. This squeeze on mortgage affordability comes at a time when many landlords are considering remortgages, property sales, or new purchases.

Rising borrowing costs and political uncertainty

Tom Bill, head of UK residential research at Knight Frank, highlights that higher borrowing costs, alongside energy price pressures and political uncertainty, are creating fresh challenges for the housing market. He emphasises the importance of the upcoming Chancellor’s approach to inflation, 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 traded above 5%, reaching its highest level since the 2008 global financial crisis. This increase is partly due to inflation concerns linked to the conflict in the Middle East, which has caused energy price shocks, further exposing the UK to inflationary pressures.

Impact of potential government changes

Mr Bill also points to investor unease over the possibility of a Labour government adopting a more left-wing stance than the current administration under Sir Keir Starmer. A leadership contest within Labour could result in a government with a looser fiscal policy, higher borrowing plans, and increased inflation risk. Such expectations tend to push up swap rates, which lenders use to set fixed mortgage rates.

House price forecasts downgraded

As borrowing costs rise, Knight Frank has revised down 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 must weigh the decision to act now or wait until later in the year, reflecting the current market uncertainty.

This outlook aligns with findings from the latest RICS UK Residential Market Survey, which indicates that “muted conditions are likely to persist over the coming months.” The combination of higher mortgage costs and the prospect of another tax-raising Budget is weighing heavily on market sentiment.

Political ambitions versus market realities

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

Paula Barker, an MP supporting Andy Burnham for Labour leadership, recently stated that “markets will have to fall in line.” Mr Bill responded by comparing this to “a homeowner asking their mortgage lender to fall in line,” highlighting the challenges politicians face in influencing financial markets.

What this means for landlords

For landlords, the rise in borrowing costs means increased mortgage expenses, which could affect profitability and investment decisions. Those considering remortgaging or purchasing new properties may face higher monthly payments, while others might be prompted to sell if financing becomes too costly.

The uncertainty surrounding political developments and inflation also complicates long-term planning. Landlords should carefully assess their financial positions and consider the timing of any property transactions, as market conditions may remain subdued for the foreseeable future.

Source: Based on reporting from Property118

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