A deep dive into BTL lending: interest rates are still driving rents upwards

Introduction

In the early autumn of 2024, the NRLA asked landlords about the on-going impact of interest rates. This post reviews the results of this element of the wider consultation. 

Over 1,400 landlords took part in this particular consultation – a high number compared to recent research . The main reason for the increased participation being the opportunity it gave landlords to share their early thoughts on the Renters’ Rights Bill which was unveiled just before the fieldwork was launched.

This post however focuses on:

1. The importance of rising interest rates on landlord decision making.   
2. The proportion of landlords who have accessed BTL finance.
3. What role Interest Cover Ratios are having on landlord behaviour
4. How future decisions are influenced by looming BTL renewals

The influence of interest rates on decision making

Chart 1 below shows the correlation between interest rate increases (and subsequent reduction) and key decisions taken by landlords on their portfolio and rent setting:

In each quarterly consultation, landlords are asked about the key factors which underpin their decisions on rent and portfolio size.

The bars in the chart above highlight firstly, the increasing proportion of landlords citing interest rates as a factor in their decision making up until the start of 2024. Secondly, how this proportion has since fallen over the last twelve months. 

Two years ago, the fiscal event announced by the Liz Truss government led to a rapid increase in base rates and dramatic changes to the mortgage market.  While it is true that an increasing proportion of landlords were already putting up rents, the chart shows how important a factor rising interest rates became for many landlords in the decision to increase rents.

In the last twelve-fifteen months, interest rates have levelled off, and then declined (much of the talk of 2024 was the anticipation of interest rate reductions). There is however greater "stickiness" in rents: The line in the chart shows that, while the proportion of landlords increasing rents has reduced, the downward slope is not as steep as that on the way up.    

These events have framed concerns about the impact of interest rates and the BTL market. Two years on from the Liz Truss mini-budget, can the PRS now expect to see rent levels stabilise? Will lower interest rates inevitably lead to an increase in landlords holding rents constant? Or, will the changing environment mean annual rent increases should now be viewed as the norm? 

The importance of BTL finance

Firstly some key numbers:

(* loan-to-value (LTV) ratio compares the amount of money borrowed to the value of the asset)

As the NRLA has previously highlighted, the impact of rising interest rates has been felt most acutely on the more common interest-only BTL deals. 

Landlords like it fixed

The NRLA asked landlords with BTL finance about fixed rate deals:

• 85% of this group of landlords have at least one fixed rate deal at present

All landlords with BTL finance - whether they currently had a fixed rate deal or not - were asked about their preferences for a new deal:

• Around one third of landlords (32%) stated they would be looking for a 2-year fixed deal
• An identical proportion stated they would look for a five-year deal.

Note that:

• One-in-seven (14%) landlords with BTL finance stated they had no plans to fix their rate in the immediate future.
  • At least some of this group will be holding on in the expectation of further base rate reductions and a better lock-in deal later in 2025.

The role of interest cover

One feature of the BTL market which has emerged as a key influence on rent setting are the terms and conditions of that lending itself. Many lenders focus on the Interest Cover Ratio (ICR). The ICR reflects the rental income a property generates and the cost of the loan. So, when interest rates are higher, then, to meet the terms and conditions of any new finance, landlords are obliged to push up rents. Note that since the phasing out of Mortgage Interest Relief, many lenders raised their ICR coverage from 120-125% to 145%. 

The consultation showed that:

• Almost one-third (30.1%) of landlords with a BTL mortgage had at least one loan with an ICR condition attached.
• Just 25% of landlords definitively stated they had no such condition attached to any of their mortgages.
• A large proportion - 45% - simply did not know whether or not they had such a condition attached.  

What might happen next?

Landlords were asked when they would be next in the market for a new mortgage deal. 

Chart 2 below sets out their responses:

The above chart shows how imminent many BTL renewals are – over a third of landlords faced a BTL fixed term mortgage renewal before the autumn of 2025.  

It is not unreasonable to suppose a proportion of these were fixed up to five years before this date. This was a period in which base rates peaked at just 0.75% - and then by April 2020 base rates were lowered to just 0.1%, where they remained until December 2021. 

Many of those landlords who locked in at those rates, and will now be preparing to go back into the financial markets, are uncertain about the future:

Note that among the sub-group of landlords who know they have ICR terms and conditions attached on their mortgage at present, an even larger proportion of landlords believe their next deal will not be as favourable as the one they have currently:

Note that for those landlords who have a renewal due before next autumn and who also believe it is unlikely they will secure as good a deal, interest rate wise, compared to what they have now:

1. Then this group are more likely to have reduced their portfolios over the last twelve months (29% compared to 24% of all landlords surveyed).
2. They are also more likely to be planning future reductions in their portfolio (58% of this group compared to 53% overall).
3. Finally, 86% of this group of landlords are planning to increase rents over the next 12 months (this compares to 74% of all landlords)

Note that for landlords who next have a BTL renewal date in 2027 or beyond:

1. Just 21% reduced their portfolios in the last twelve months
2. The proportion planning to sell in the next twelve months is also smaller - 44%
3. A slightly smaller proportion of this group of BTL-landlords will still increase rents (82%)

It is those those landlords with no BTL commitments at all who are much less likely to increase rents - the date of BTL renewal is at present having only a mild effect on the likelihood of raising rents over the next twelve months.

• So, whilst 66% of landlords who let property without any BTL finance at all are planning to increase rents...: 
  • ...this compares to 79% of all landlords who do have BTL finance.  

Summary: implications for the PRS

This blog post has presented evidence which supports the following:

1. Rising interest rates had a significant effect on many landlords' decisions around rent and portfolio size.
2. Now rates are falling, the effect is lessening - but is still present. 
3. BTL finance underpins the business model of almost two-thirds of NRLA-member landlords. 
4. Whilst some landlords with BTL finance are waiting, in expectation of further interest rate reductions, most landlords prefer the certainty of fixing their interest rates.

In terms of the influence of interest rates and BTL lending for 2025:

1. A large portion of landlords are facing the end of at least one BTL mortgage deal. 
2. For many, the next lock-in rate will not be as attractive as the deal they have at present as the era of 'cheap money' - which ran from the date of the Global Financial Crisis to mid-2022 -  has now ended. 
3. This group of landlords are more likely to be considering both portfolio reductions and rent increases over the next twelve months in response to the increased mortgage rate they are anticipating.
4. For many landlords, interest rate cover conditions mean they will have no choice other than to raise rents in response to the terms and conditions of any new deal.

The sector will need to reconcile these pressures on individual landlords with the rent tribunal proposals outlined in the Renters' Rights Bill. Irrespective of whether a landlord has BTL finance or not, the forthcoming legislation is cited as the number one reason for pushing up rents in the next twelve months by landlords.

This tension is going to be is going to be one of the key features shaping the PRS during 2025.