Impact of Rising Interest Rates on Homeowners and BTL Landlords

Following the mini-budget on September 23rd as well as the UK’s defined benefit pension industry crisis the following week, UK bonds, otherwise termed as gilts, saw their prices plummet and interest rates (termed yields) soar considerably. Reasons for this were manifold.  The mini-budget announcements of debt-funded tax cuts to the tune of £45 billion including a shock announcement of the decision to cut the 45% additional higher rate of income tax to 40% (a plan now scrapped) created concerns over the financial integrity and prospects of the UK economy given that the government’s plan relied on economic growth of 2.5%. The UK witnessed a flight of capital as investors flocked their funds to the US where the Fed has just raised the rate by an additional 0.75%. Additionally, defined benefit pension funds faced margin calls for their derivative trades which led to many selling gilts thereby creating further downwards pressure on the price of gilts which led to higher interest rates too given the inverse relationship between the price of gilts and their interest rates.

But how does all this link back to mortgage rates? Mortgage rates are driven by swap rates, the latter being linked to interest rates on bonds. Hence if interest rates on bonds rise, banks suddenly find the need to reprice their mortgage offerings given that their initial offer becomes uneconomical. You may have heard the likes of Virgin Money and Halifax pulling fixed-rate mortgage products from the market as they had to reprice these. Homeowners and buy-to-let (BTL) landlords who’re on variable rate products or who face the prospect of refinancing either this year or early next year can face an increase in their mortgage repayments of up to 70% as per some real estate analysts. This presents a daunting prospect in terms of affordability given that mortgages are often the largest monthly expenditure for most households.

For buy-to-let landlords with more than 1 property, seeking accurate financial reporting on which of their mortgage repayments have risen so they can evaluate the profitability of the property and thus reconsider the appropriate rent to charge tenants is crucial. With our cloud accounting software Xero, we at Cheylesmore Accountants can provide them with just that. Xero can enable the creation of separate account codes as well as tracking categories for each property so that it can be viewed in isolation and thus it’s financial performance can be evaluated accordingly. This includes assigning mortgage repayments or expenses alike repairs and maintenance to the particular property.

Feel free to contact us via our website or book a meeting with our partner should you wish to explore the various ways we can develop your business.