Inflation, how the rise of interest rates and cost-of-living could impact landlords

Earlier this year, the Bank of England forewarned the worst cost of living crisis since records began after raising interest rates to 1%, it’s little surprise that the inflation is being felt by the UK’s 4.5m private renters. But with bills spiralling dramatically upwards, borrowing at an all-time high and wallets stretched, how are landlords feeling the effect of these unprecedented times?

The impact of rising inflation rates

The base rate (on which mortgage lenders decide interest rates) remained below 1.0% for 12 years and dropped to a historic low of just 0.1% as the pandemic took hold in March-2020.

However, as we all started to resume our ‘new normal’ lives in late 2021, the rate had dramatically bounced back to 0.5% and on to 0.75% by March-2022, prompting a subsequent increase in costly repayments for about two million households (according to a report from UK Finance).

Given that most Buy-to-Let mortgages are interest-only repayments, many of those affected by the latest hike will be landlords. This cost is naturally passed on to tenants in rent rises.

The average cost of renting a flat in the UK has grown 11% in the last quarter, the highest rate recorded since 2008, meaning that the average monthly rent was up to £969 for the first quarter of 2022, equivalent to an £62 a month increase since the start of the pandemic.

This has proven to be good news for tenancy duration, with 18% of landlords reporting that their tenants are staying longer than last year. On average, UK tenants are staying in their rental properties for an extra five months compared to 2017, with the average tenancy length up from 51 weeks to 75 weeks.

As with every ‘boom’ period, there is already a word of warning; affordability considerations may now start to limit further rental growth depending on location. As renters struggle to afford the rent rises (which can be as much as 11% in some areas of the UK) they may move out of key growth areas.

Cost of living

As the inflation rate soars, we are witnessing a cost-of-living crisis that has hit millions of households. Gas and electricity bills rose by almost £693 to £1,971 as Ofgem announced a record increase in the energy price cap. The issue is so severe it is reported that some 2.3 million private rental tenants will be declared in fuel poverty.

Many landlords have stopped including energy bills in their rent considering these growing costs. If they continue to include bills, they need to increase their rent by a significant amount.

So uncertain is the future for both owners and renters, that Energy regulator Ofgem is suggesting that the energy price cap be updated quarterly rather than every six months, which may help landlords and their tenants manage spending more effectively.

Primary advice for landlords is to review the energy efficiency of their buy-to-let properties and try to work with their tenants. As well as lessening the impact of rising costs, energy improvements can increase property value and help to be ready for any future energy-saving legislation.

69% of UK landlords wanted to help their tenants through the cost-of-living crisis, including temporary rent freezes.

Protecting income

Taking steps to protect your income and investment is particularly wise in this uncertain period, especially as arrears appear to be on the rise. Repossession can take a long time, and you can be left with significantly high costs.

Not passing on rent rises above reasonable inflation will inevitably give you stability and help your tenant in these hard times. So, maybe evaluating how good a tenant is, how well they look after your property and how regular they are with their rent payments is worth protecting more in the long run.

As a safeguard you could take out landlord Insurance to protect your rental property against loss and damage and protect your rental income should there be insured damage.

Want to know more? Give us a call, our expert Commercial Property Insurance teams can talk you through options available to private landlords, and the cover levels that can give real peace of mind.