Landlords in the UK are paying 40 per cent more mortgage interest than in August 2022, which equates to an extra £4.3 billion each year, says lettings agency Hamptons.

In August, mortgaged investors handed over an average of 37 per cent of their rental income in mortgage costs, up from 28 per cent a year ago.

As a rising number of landlords face higher rates when their mortgage deals expire, investors across the United Kingdom are now collectively paying £15.0 billion in mortgage interest annually.  This figure has increased 40 per cent (or £4.3 billion) over the last 12 months and 58 per cent (or £5.5 billion) since it bottomed out in November 2021. 

This rise reflects a combination of new investor purchases at higher interest rates, existing tracker rates increasing, and fixed-term mortgage deals expiring.  This comes even though the number of outstanding buy-to-let mortgages has been falling since November 2022 as investors have either paid down debt or sold up.  Despite this, the total value of all mortgages has remained broadly flat over the same period, says Hamptons.

This relatively recent surge in rates follows a long-term fall in borrowing costs which began in 2015 and concluded in 2021.  

Between March 2015 and November 2021, the total amount of mortgage debt held by landlords rose by 43 per cent.  However, the total amount of mortgage interest paid fell by three per cent over the same period, driven down by falling interest rates.

The increase in borrowing by landlords predominantly wasn’t spent on property, with the number of rented homes rising by just 4% over the same period.

As landlord’s fixed mortgage terms expire, the number on cheap mortgage rates will continue to dwindle unless rates fall substantially.  Consequently, this £15.0 billion figure is likely to continue rising over the coming months and years, even if mortgage rates remain close to where they are today. 

The average mortgage rate on outstanding landlord debt stood at 3.4 per cent in August.  However, if this rate hits 4.0 per cent, landlord’s total annual mortgage interest bill will reach £17.9 billion.  At average rates of 5.0 per cent, it will hit £22.4 billion and at 6.0 per cent, £26.8 billion.

Overall, mortgage interest accounted for around 26 per cent of all rental income in the UK, up from a low of 17 per cent in January 2022.  However, this figure includes rental income from landlords who do not have a mortgage.  The average mortgaged landlord paid 37 per cent of their rent on mortgage interest in August, up from a low of 24 per cent in November 2021.

The agency warns that as more landlords face higher mortgage rates, the proportion of rental income being used to pay mortgage interest will continue to rise. At an average outstanding rate of 4.0 per cent around 43 per cent of rental income paid to mortgaged landlords will be spent paying mortgage interest, rising to 54 per cent at 5.0 per cent rates and nearly two-thirds at 6.0 per cent rates.

Aneisha Beveridge, Head of Research at Hamptons, says: “With mortgage interest often landlords’ largest cost, the pace at which rates have risen has squeezed investors. Even if there are no further rate hikes by the Bank of England, we could see the amount of mortgage interest paid by landlords exceed £20 billion over the next two years.

“This has the potential to eat up just over half the amount mortgaged landlords receive in rent.  For some investors, this will be unaffordable, and they will likely bow out, keeping upward pressure on rents.”