The Mortgage Trap Some Homeowners Face
The Challenge of Interest-Only Mortgages
Most purchase-to-rent mortgages held by homeowners are interest-only, a spokesperson for the National Residential Owners Association (NRLA) warns that this exposes homeowners to the risk of rising interest rates. With such mortgages, homeowners only pay the interest on the loan each month, without reducing the principal amount borrowed. As a result, they are vulnerable to any increase in interest rates, which can put them in a difficult position.
The Dilemma of Rising Costs
The NRLA spokesperson further explains that homeowners with interest-only mortgages have two choices when faced with rising costs. They can either raise rents to cover the increased expenses or exit the market entirely. This dilemma puts homeowners in a challenging situation, as raising rents may lead to tenant dissatisfaction or potential vacancies, while exiting the market means giving up on the benefits of property ownership.
Preserving the Rental Sector
The NRLA emphasizes the need for urgent action to ensure that the private rental sector does not shrink. As costs continue to rise, there is a real risk that more renters will face destitution if they are unable to find high-quality private rental accommodation. Therefore, the NRLA is currently campaigning for the reintroduction of mortgage interest relief and for housing benefit rates to be unfrozen, in order to provide relief and support for homeowners and tenants alike.
The Impact on Homeowners
The Mortgage Trap extends beyond the challenges posed by interest-only mortgages. Specialty buy-to-let lenders, such as Landbay, stopped offering homeowners product upgrades, while some building societies, including Newcastle BS, have recently withdrawn this option due to market volatility. As a result, homeowners find themselves in a complicated situation when their fixed-rate agreements end.
Rising Interest Rates and Stress Tests
When homeowners with fixed-rate agreements approach the end of their mortgage term, they may encounter an issue where the rents they charge are insufficient to meet the stress test for securing a new fixed-rate mortgage. This stress test involves assessing the homeowner’s ability to afford the mortgage payments with an interest rate above 6 percent. Unfortunately, many lenders do not offer rate changes for buy-to-let customers, leaving homeowners stuck with higher standard variable rate payments.
The Affordability Assessment Challenge
While product or rate changes do not typically require an affordability assessment, a remortgage does. At this stage, homeowners face the daunting task of proving their ability to afford the mortgage with the new interest rate, which may exceed their rental income. This reality poses significant financial strain and forces homeowners to make difficult decisions.
The Landlord’s Dilemma
A landlord highlighted the challenges he faced when his fixed-rate agreement ended after six years without raising his tenants’ rent. Despite increasing the rent by £300, it still proved insufficient to meet the lenders’ new affordability requirements. This situation poses an essential question for landlords: should they sell the property or raise the rent again?
Lack of Flexibility from Lenders
A major concern voiced by industry insiders is the lack of flexibility and rate changes offered by lenders. Homeowners feel forced to make a decision due to inflexible policies, leaving them with limited options. This lack of customization exacerbates the challenges they face, as they find themselves trapped in a system that does not adapt to their individual circumstances.
Looking Towards the Future
The Mortgage Trap calls attention to the existing vulnerabilities within the buy-to-let market. It exposes the risks associated with interest-only mortgages and the difficulties faced by homeowners when their fixed-rate agreements expire. The lack of flexibility from lenders further exacerbates these issues, leaving homeowners in a precarious situation.
The Importance of Policy Changes
Addressing these challenges requires comprehensive and proactive solutions from policymakers and lenders. Introducing mortgage interest relief and unfreezing housing benefit rates can provide necessary support to homeowners and mitigate the potential shrinking of the private rental sector. By taking urgent action to protect homeowners and tenants, policy changes can help alleviate the mortgage trap and ensure a more stable housing market.
Summary
The Mortgage Trap exposes the vulnerabilities faced by homeowners with interest-only mortgages. Rising interest rates and inflexible policies from lenders create a challenging environment, forcing homeowners to choose between raising rents or exiting the market. Urgent action is needed to preserve the private rental sector and protect renters from destitution. By reintroducing mortgage interest relief and unfreezing housing benefit rates, policymakers can provide relief to homeowners and tenants alike. Ensuring a stable housing market requires proactive solutions and flexibility from lenders to prevent homeowners from falling into the mortgage trap.
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Most purchase-to-rent mortgages held by homeowners are interest-only, which, according to a spokesperson for the National Residential Owners Association (NRLA), makes them particularly exposed to rising rates. .
They added: “This is putting many in a difficult position, with the option of raising rents to cover rising costs or exiting the market entirely.
“Much more needs to be done to ensure that the private rental sector does not shrink as costs continue to grow. Without urgent action, there is a real risk that more renters will face destitution as they are unable to find high-quality private rental accommodation.”
The NRLA is currently campaigning for the reintroduction of mortgage interest reliefand that housing benefit rates be unfrozen.
The Mortgage Trap Some Homeowners Face
Specialty buy-to-let lenders like Landbay have not offered homeowners product upgrades for some time. But some building societies have withdrawn the option more recently, Newcastle BS being one.
While the former says the financing lines make offering the option difficult, the latter says it is responding to the latest market volatility.
Mortgage broker David Gissing of LDN Finance said some homeowners whose fixed-rate agreements are ending have found that the rents they charge are not enough to cover the stress test for a new fixed-rate mortgage with an interest rate above 6 percent.
Mr. Gissing added: “To make matters worse, many lenders do not offer rate changes for buy-to-let customers. This means that the standard variable rate payments will be more than the rent received.”
Product or rate changes do not require an affordability assessment, while a remortgage does.
A client landlord of Mr. Gissing had not raised his tenants’ rent for six years. Now they have increased the rent by £300 and it is still not enough to cover the new affordability requirements of the lenders.
He said: “Even if a rate change to 6 per cent were allowed, it would still ‘wash its face’. So, as a landlord, do you sell or raise the rent again?
“Lenders are effectively forcing a decision and are not flexible with rate changes.”
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