From This is Money, spotted by Mombers:
Forecast rises in interest rates could force landlords to raise rents to meet mortgage affordability criteria, or risk being trapped on higher rates, according to a buy-to-let expert. This is because interest costs across the life of a buy-to-let mortgage would more than quadruple, going from £115 a month in interest now, compared to £479 with the rise in one example.
The Office for Budget Responsibility has forecast a worst-case scenario whereby a ‘wage spiral’ or energy price shock would require the Bank of England to increase base rate to 3.5 per cent in 2023 to curb inflation.
Rents are the Maypole around which house prices dance. Current selling prices and/or what people are prepared to borrow is the Net Present Value of the rental income (for a landlord) or the rent saved (for a first time buyer).
More prosaically, prices will settle at approx. the level where the monthly mortgage payments are about the same as the rental value. So sure, if there is a big interest rate hike, selling prices will fall (all things being equal) so that new buyers’ monthly mortgage payments are still approx. the same as the monthly rent.
Landlords can’t ‘pass on’ that fall in value any more than they can ‘pass on’ higher interest rates, a tenant would just move out and rent from a landlord who had bought at the low price/higher interest rate.
If old landlords could ‘pass on’ higher interest rates, then madness would ensue – those new landlords would be charging a new higher rent with interest payments based on old lower rents i.e. making a super-profit which would be competed away almost immediately.
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