I am writing this the day following the shock announcement that interests rates are rising again, the 13th rise in a row, to 5%.
How High Could Interest Rates Go?
“The Bank rate is at its highest level for 15 years, as the Bank tries to slow the rise in the cost of living.
But the rate seems likely to go higher. Bank governor Andrew Bailey has said that if prices continue to rise rapidly then further rate increases will be needed. The financial markets expect rates to peak at about 6% early next year.
The theory is that raising interest rates makes it more expensive to borrow money, meaning people have less to spend, and so bringing down demand and slowing price rises.
There has been a series of Bank rate increases since December 2021 attempting to control inflation – which charts rising prices. The inflation rate target is 2%.”
I remember the days of 18% interest rates and the impact that had on everyone, people were handing their keys back to the building societies because at that time the property market had collapsed and people could not sell themselves out of their debt. This was homeowners but landlords were panicking too. There was a lot more social housing available and many people turned to their councils to rent a home, especially those who had children in schools and needed to remain in the school catchment areas.
In those days, lenders had been more cautious and therefore most landlords didn’t have the level of debt we see today. Loan value was low even when the market collapsed, unlike now when many landlords are trapped with mortgages that they cannot afford to pay and a potential sale price that would not cover both the debt and the capital gains tax, even if they could sell at a decent price.
Even before the latest interest rate increase, I read a post on my Facebook group where the landlord told us that her mortgage adviser had said that lenders have pulled back some of the Buy to Let mortgages because “the interest rate is so high that the rent will not be enough to pay the mortgages”. I don’t usually comment publicly on this but in my opinion the lenders have been very irresponsible watching this unfolding and not asking for a higher rent to repayment criteria. Lenders are the ones with experience of the current situation, and they should not have allowed it to happen again. In my opinion, it is now too late to withdraw their products and they will be repossessing from both landlords and homeowners as they did in the past.
On the other side of the coin, there are many cash-rich people waiting for an opportunity to invest for a decent return. When they see that properties are down to “bargain” levels they will buy in and many will offer those properties to let. If the government are hoping that the modest end of the market will see an increase in homes to rent, they need to remove the embargo on increases in the housing benefit element of Universal Credit. The embargo has been in place since 2020, to give those tenants the hope of finding a landlord who will offer them a new home, especially where they are families because many landlords specialise in this market but they have been hit by interest rate rises and capped rents and it just doesn’t work any more.
As the cash investors increase their holdings, we can expect that certain markets will see an additional supply which will put downward pressure on rents. The student market is a good example of this where private and corporate investors see a good return and a safe market. This means that even those of us who think that we can get through this difficult time will see changes which we may not have anticipated.
I am experiencing both sides of this horrible situation; my hairdresser was almost in tears telling me that her landlord had visited to explain how he must ask her to leave the house where she has lived for 5 years with her two sons because he cannot afford the mortgage payments and her rent is already at the top of the market. Her youngest son is going into his GCSE year in September and it couldn’t be a worse time to try to find a new home. She said that she gets on well with the landlord but that she can’t move until she has another home for her family and she is hitting a brick wall when she applies to view anything which comes on the market. The landlord has self-managed and has slipped up with his paperwork, therefore it will take some time to evict her. She was relieved to know that the verbal conversation does not count as legal notice to leave and that she may have more time to find somewhere. The landlord thought that simply telling her nicely that she must leave next month was the way to regain possession. I hear this a lot. If you find yourself needing to regain possession/needing to evict a tenant, please read my guidance published in April here:
The court services are under a lot of pressure at the moment, this is causing long delays. As more people decide to sell up, this will only get worse. You need to expect to wait up to a year after you serve a valid Notice, before you actually get your property back and during that time the tenant can refuse to allow Estate Agents or potential buyers to come into the property and can even change the locks to enforce their decision. This is their legal right. Please read the article linked above and don’t cause the delay to be any longer than necessary.
Some Landlords are Exploring Other Markets
Last year I experienced the worst tenant I have had in over 50 years as a landlord. Not only did he not pay his rent, but he also destroyed the property with a pipe bender and hammer and later by setting it on fire. He frightened the neighbours, one moved in with her daughter to get away from him, and he made me ill with the stress and when he eventually left and the insurance company had the house reinstated to the tune of £25,000 (a one bedroomed house) I couldn’t face it again and that house is now sold to an owner occupier. This isn’t anything to do with interest rates etc., it is purely the result of what one tenant can do to a good landlord. In the middle of this episode, one of my other tenants left a similar property to work abroad and instead of doing what I have done so many times, preparing the property and marketing it to find a new tenant, I left it empty. At that time, I couldn’t have explained why but I can say now that I had lost my verve – I cannot remember when I wasn’t a landlord and now I was afraid to look for a new tenant. I am fortunate that I can keep a property empty and I have no one to answer to but myself and I allowed myself time to recover my equilibrium. In October I decided to let the property as a short-term let for a year. I prepared and advertised it on Airbnb and sure enough I got bookings.
This is not the first time I have been in this market, until 2015 I let holiday homes in Dartmouth, Devon, but I gave that up when it became difficult to control the quality of the cleaning and maintenance from 200 miles away – this was before Airbnb was born and services to help with this grew around it.
I decided that I would try it for a year and decide this September whether to continue or not. The short-let market is one of the most popular alternatives that landlords are looking at because, not only is it popular in “holiday” and “tourist” areas, but it is also very popular with contractors who only want Monday – Thursday each week or those who only want odd weeks in different areas. There is a niche for most areas and most types of lets.
My property is “Almost in the Centre of England” in fact it’s 9 miles from Meriden where the centre of England is designated by a stone monument, it’s close to Birmingham Airport, NEC and Stratford Upon Avon, therefore it covers several markets.
My costs from November 2022 until the end of the Tax year, April 2023 are £5852.37 and my income is £6,211.64. The costs included council tax, water, gas, electricity, broadband, TV licence and the many items needed to set up from a Smart TV to a snazzy coffee machine. The house was fully furnished but I don’t usually supply bedding and linen, towels etc., I hired these from a laundry at a fair cost and they deliver and collect it weekly. There were the personal hygiene items, basic ‘breakfast’ items, laundry items ….. it all adds up as you can see and while an average of £1,000 a month rent is £100 more than the rent I would get from a long-term tenant, that £100 only covered half the council tax and none of the other costs. At the end of the 6 months, I made £1,400 (£230 pcm) instead of the £5,400 (£900 pcm) I would usually make, less a few minor costs. In addition, it is so hands-on. I cleaned and changed the beds between guests, shopped for the items I supplied, and paid a gardener to cut the lawns …. Then there is the constant feeling that they can contact me at any time of the day or night because something has gone wrong. This didn’t happen this time but when I let in Dartmouth it happened regularly and the favourite was, in the early hours of the morning “Do the numbers of the key safe have to line up in the middle or at the top?” This after having sent clear instructions and photographs.
Most of the guests I have hosted have been really lovely and have given me great feedback on my property, which is genuinely nice, but this is another issue for me. On the discussion groups for Airbnb, so many people stressing about needing 5-star reviews to get bookings. I have never needed external validation, I set myself very high standards and I do this to please me because I want to be the best landlord that I can be and to make my tenants feel safe and happy in my properties. The idea that a picky guest could give me a poor review or even less than the 5-star holy grail which would then reduce my bookings goes against anything I have ever done.
There Was One Guest Who Made My Decision Very Easy For Me
Long story short I took a booking from a guest who had “5-star reviews” from several hosts. It turned out that the guest was his ex-wife visiting her children, the family lived nearby. There were several issues because she smoked and deliveries (I didn’t know what was being delivered but I soon found out) were coming all through the night. I have a Ring doorbell which they knew about. When she had gone, the house stank of urine, alcohol, and cigarette smoke. The bedding and carpets were soaked in urine The bins were full, after 10 days, of bottles and cans, takeaway packages, cigarette ends etc., and there was a hole in the microwave where she had put the foil containers off the takeaways in to heat the food…. Obviously, there was a problem, I saw one of the children, about 5 years old being carried out crying by her daddy through the Ring camera. I decided not to make a bad situation worse, and I didn’t claim for the microwave, bedding, carpets etc… which would have been covered by Airbnb insurance, but would no doubt have impacted the father who was already dealing with this sad situation. Those costs are not included in my figures above.
Fortunately, this was a one-off, but it was one out of 5 guests and those odds are not ok for me going forward.
I have now got one more guest to go. I set the minimum stay at 4 nights because I didn’t want weekenders every weekend and I set a discount for longer than 28 days. I have had longer-term guests, the next one is for 30 days and when it ends in August I will be advertising for new long-term tenants. I don’t know whether I am ready to trust my instincts again yet and if not, I will use a trusted local letting agent.
I feel good about my decision because having sold one property which was in the letting market since 1998, I didn’t want to take another one off the market.
I am so sorry for those of you who haven’t got a choice, but before you think about removing your tenants try speaking to local Estate and Letting Agents, many of them will know landlords or investors who are looking for instant cash flow and will buy with a good tenant in place. This is a really good solution for sellers and buyers because you have rent up to or from the date of completion and even better for tenants who don’t need to lose their homes. Make sure that you’ve got your rent records up to date to be able to show that you have good tenants.
Another alternative is to speak to your tenants to find out whether they are in a position to buy the property, get some advice from a good mortgage broker and see if you can help them to make this happen, especially since you will be saving on the cost of an agent, no eviction costs and no void up to the last minute. I wish you good luck in finding a good solution.