How worried should renters be about interest rates?

Despite this month’s fall in the rate of inflation, it is likely that higher interest rates will be with us for a long time. The media’s focus has been on what this means for mortgaged home owners, but people are rightly asking what this will mean for renters.

How many are affected?

Interest rates won’t affect all renters, though exactly how many is hard to estimate. Many landlords are mortgage-free – according to UK Finance (via BuiltPlace), there are around 2 million buy to let mortgages in the UK, while latest data from each nation indicates there are 5.57 million private rented homes. That’s 36%.

Zoopla analysis suggests a higher proportion of landlords have mortgages – closer to 60%. This mismatch might be explained by some landlords not having standard buy-to-let mortgages, and multiple property landlords having a mortgage on only some of their properties.

Within that group there is much variation. Even when landlords have mortgages, their debt might be low enough to remain profitable even as interest rates soar. For example, they might have bought in 2010 when property prices were relatively low and rising rents since then have increased the profit they’re making during the low-interest rate years since.

That said, most landlords with mortgages are only paying the interest on their loans, meaning that even after a decade they still have the same loan they started off with.*

Not only that: unlike owner occupiers, whose mortgage payments include a chunk of the loan they’re paying off, landlords on interest-only mortgages are paying pure interest. That means if their mortgage rate goes up from 2% to 6%, their payments triple.

Zoopla estimates that up to 30% of landlords have so much debt that increasing interest payments will mean they “face the greatest squeeze on cashflow” – that’s around 800,000 landlords based on HMRC data.

The Bank of England reaches a similar conclusion. Its recent Financial Stability Report predicted that monthly buy-to-let mortgage payments will increase by an average of £275 by the end of 2025. The Bank considers landlords with interest payments worth 80% or more of the rent to be more likely to experience payments difficulties. At the end of 2022, just 3% of buy-to-let mortgages were in trouble on this basis; if there were no change to rents, this would increase to 40% of buy-to-let mortgages by the end of 2025. That’s approximately 800,000 homes, or 14% of the UK’s private rented sector.

What will those landlords do to cover their interest payments?

Many landlords have already been raising rent since the end of pandemic restrictions, when demand for homes starting growing again. According to Zoopla’s data, rents on new tenancies in the UK have risen from £923 in March 2021 to £1126 in April 2023, an increase of 22%.

Landlords can in theory raise their tenants’ rent to the local market level either through a Section 13 notice, which the property tribunal will generally back them up on, or by evicting their tenant using Section 21 and getting a new one in who will pay the going market rent. But we’re now in a situation where a minority of landlords might be paying out more in interest payments than even today’s inflated market rent can cover.

What if landlords demand a higher rent when they are already charging what the market rent is? Three things could happen:

  1. The tenant challenges the rent at the tribunal, which finds in their favour – i.e. tells the landlord they can’t charge more than the market rent (some victory, I know). The tenant stays put – but eventually the landlord might decide they can’t make the numbers work so evicts the tenant using Section 21 in order to sell.
  2. The tenant decides that the cost of moving, or the risk of challenging it, is greater than simply paying the higher rent – even if they can’t really afford it. So the tenant starts paying the higher rent – and makes cuts to other spending or goes further into debt.
  3. The tenant is able to move out (maybe they have enough savings for a deposit and upfront rent on a new place) so they move somewhere else and pay the market rent there. The landlord struggles to find a new tenant at the rent they wanted from the original tenant, so they lose more money than they would if the tenant had stayed because the property is vacant.

We can expect to see all these scenarios play out to varying degrees in the months and years ahead – though the lack of awareness about the rent tribunal, and the risk that it will award the landlord a higher rent than they asked for, makes that option by far the least common. In the space of 30 months, the tribunal heard just 341 cases from private renters.

But even for this minority, the one in seven private rented properties that the Bank of England predicts will struggle to cover interest payments, it is clear that landlords cannot simply pass on the recent hikes in the base rate to their tenants. Rents will still rise but only because we lack adequate regulation, and have failed to build enough homes in the places people want to live.

Thousands of tenants will go hungry, cold or into debt – or find themselves homeless. If they start paying a market rent – or higher – but can’t keep up, they could get into arrears then face eviction. Other tenants will face eviction because their landlord wants to get out before they lose any more money. We might even see landlords who can’t raise the rent falling behind on mortgage payments and being repossessed by the bank – in these situations, again, tenants are vulnerable to eviction, but by the bank this time.

What should government do?

The government is so alarmed by the potential impact on owner-occupiers that they have agreed with banks to be more lenient on borrowers in distress. A Mortgage Charter announced in June gives home owners the ability to extend their mortgage period or switch temporarily to an interest-only mortgage, and leaving it longer before starting repossession action.

But if the government wants to keep people in their homes, they need to do something for renters – especially since they were nowhere to be seen when rents were rising at their fastest rate in living memory.

In Scotland there are restrictions on in-tenancy rent increases, and landlords must apply for an exemption if they are facing financial difficulties. Any package for the private rented sector needs to consider how to stop rent costs spiralling for renters rather than the mortgage holders.

We also need protections when renters face eviction for reasons beyond their control – remember landlords will still be able to evict to sell under the Renters (Reform) Bill. We need:

  • Longer notice periods – at least four months
  • Financial support from landlords to move home
  • Measures to encourage sales with sitting tenants
  • Commitments from banks not to evict tenants whose landlord defaults

The government must also make sure that the 35% of private renters relying on benefits can actually cover the rent by relinking Local Housing Allowance to market rents. It is currently frozen at 2019 levels.

Longer term, we need to reverse the recent rises in rent by building more homes in areas where people want to live. In particular, successive governments have failed to build enough social housing. We also need to consider how to bring homes that financially distressed landlords are selling into the social sector, rather than allow panicked sales to create chaos and upheaval for renters without making lasting improvements to the housing system.  

And we should do something about mortgage lending rules so landlords can never put their tenants’ homes at risk again because of unmanageable debt.

*yes, that does mean that landlords get lower payments than owner-occupiers for the same size loan, putting them at a huge advantage in the housing market. And yes, it does mean that if you think you’ve been paying off your landlord’s mortgage when you could be paying off your own, you’ve actually only been servicing a complicated bet on house prices. And yes, it does mean that having lots of private landlords with large debts is even worse for the economy than most people previously thought.

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