Tenants and rental investors could be hit hard by rising mortgage rates, with potentially serious impacts on the availability of rental accommodation, a committee of MPs has heard.
The Treasury Committee heard testimony about the potential impacts of rising mortgage costs for mortgage holders and renters.
Mortgage rates rose sharply amid market turmoil following the mini-budget and many products were pulled from sale.
The rates offered on home loans have generally risen in recent months, following a series of base rate hikes by the Bank of England.
Chris Rhodes, chief financial officer of the Nationwide Building Society, said the buy-to-let sector had been particularly hard hit, meaning: “It is marginally profitable for new buy-to-let investors, even at a loss , to take over a new property, so I think there are potential medium-term implications for the sustainability of the buy-to-let market.
Ray Boulger, senior technical director of mortgages at brokerage John Charcol, added: “I think the buy-to-let market is where we’re likely to see a lot more stress than the residential market.”
Joanna Elson, chief executive of Money Advice Trust, said: ‘And of course the impact of that is on tenants.
Ms Elson said people’s homes tend to be “the last thing they give up”, so they cut other expenses to keep the roof over their heads.
Mr Boulger said: “What we are seeing now are changes in criteria and we are seeing situations where customers are not able to proceed with the amount they originally planned to borrow due to changes. of criteria.
“It’s not just about the rate, it’s the rate and the criteria, especially the stress test rates, they’ve been changed because of the rate hike.”
Stress tests look at how affordable mortgage payments can be for borrowers in the future.
Mr Boulger continued: ‘When you take into account the other impact of increases in energy prices and the cost of living, this can have a significant impact on what people can borrow.’
He said stress levels are “particularly an issue for buy-to-let.”
Referring to landlords, he said: “If you need a mortgage and you need an LTV (loan-to-value) greater than 50% or 60%, with current stress rates, it will be very difficult.
“And the ripple effect of that, combined with the sale of some existing owners due to the more onerous tax regime and other regulatory requirements and higher mortgage rates, I think, is going to have a pretty serious impact on the availability of rental properties over the next year or two.
Discussing the implications of the mini-budget, Charles Roe, director of mortgages at trade association UK Finance, said: “The products were available. But lenders were also handling a large number of phone calls and inquiries from borrowers who were worried about their finances, if they could remortgage.
“But throughout this period, lenders offered follow-on products to borrowers who were coming to the end of a fixed rate product.”
He added: “We are seeing the markets return to much more stability over the past two to three weeks. As a result, swap rates (which lenders use to price mortgages) have fallen and, in turn, lenders are reducing their mortgage rates.
Explaining why bonds or gilts impact the mortgage deals lenders can offer, Mr Rhodes said: “As the yield on long-term gilts, so the yield on five-year gilts, rises, the yield curve swap increases and the cost of hedging a five-year fixed rate mortgage increases.
When asked if this directly affects the prices of mortgages that can be offered, he said: ‘We estimate business that we will write in the next two working weeks, 10 working days roughly, we reserve those hedges in the market, so we have a financial commitment to those hedges, and that’s what’s used to back the mortgages.
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