High-fee, low-rate products may be keeping landlords afloat today, but a refinancing crunch could follow within five years
Landlords coming off cheap fixed-rate mortgages are being steered towards high-fee buy-to-let products that could leave them trapped at maturity – a situation one adviser describes as a new form of mortgage prisoner that the regulator has no framework to recognise.
Nouran Moustafa (pictured top), executive financial and mortgage adviser at Roxton Wealth, told Mortgage Introducer the problem is already visible in client cases and warned the industry has a narrow window to act before the consequences become systemic. "We are creating a new style of mortgage prisoners, but they will never be classified as mortgage prisoners because they don't fit the mortgage prisoners FCA definition," she said.
The mechanics are stark. A landlord who took a £375,000 buy-to-let mortgage at 3% interest was paying approximately £940 a month and charging rent of £1,500. Coming off that rate now, the lowest available fixed rate is around 4.5%, pushing monthly payments to approximately £1,406 before standard fees. At that point, Moustafa said, the landlord will fail the rental stress test and faces three options, none of them straightforward.
Three options – none of them comfortable
The first is a product transfer with the existing lender regardless of pricing, because no other lender will accept the case. The second is moving to a new lender and injecting cash to cover the shortfall. If the maximum borrowing elsewhere is £340,000 against a £375,000 balance, the landlord must find £35,000 from their own resources. The third is a high-fee, low-rate buy-to-let mortgage, accepting a product fee of up to 7% added to the loan in exchange for a lower headline rate that clears the stress test.
Moustafa said there is no general rule for when that third route is the right solution, but the underlying arithmetic does not improve with time. A 7% fee on a £300,000 mortgage adds £21,000 to the balance. At a 4% rate, that sum alone generates approximately £4,200 in interest over five years, and the capital remains outstanding at maturity. "The growth in house value and the growth in rentals are not going to keep up with the exact same level of fees," she said. "And I just don't know what would happen."
What happens at the five-year mark
The Bank of England notes that lenders commonly test buy-to-let affordability using an interest coverage ratio of at least 125%, with higher-rate taxpayers typically assessed at around 145%. At a 145% ratio and a 5.5% stress rate, annual rent of £24,000 supports a mortgage of approximately £301,000, not the £321,000 balance that results once a 7% fee has been capitalised.
Moustafa was direct about the timeline. "Give it four or five years from now and we are all in," she said. "I think this will affect house prices because landlords would reach a level that they can no longer afford to keep the property, so they will have to sell. And when they sell, they will be in a very bad position, and they will be happy to accept lower than market values."
If that plays out at scale, she argued, the primary beneficiaries will be institutional buyers. "This will be the biggest bingo-winning card to each and every big corporation that wants to be the biggest landlords in the UK," she said. "Lloyds want to be the biggest landlord, they will be, because they will have so many houses to buy from people that can no longer afford their mortgages."
What happens to tenants when landlords exit?
Successive policy changes, including the stamp duty surcharge increase from three to five percentage points in October 2024, the restriction of mortgage interest relief to a basic rate tax reduction, and the Renters' Rights Act provisions in force from May, have cumulatively increased the cost of operating as a private landlord. Moustafa said policymakers have not accounted for what happens to tenants when landlords leave. "Nothing. You will have 10 tenants trying to get into one property."
The dislocation is already reshaping where landlords invest. Moustafa said clients are moving north in significant numbers, drawn by better yields and lower concentration risk. "Why would you have a big flat in London generating £4,000 a month when you can have four houses up north generating the same amount of money?" she said. "One tenant in one flat, if they decide they're not going to pay the rent, you're in big trouble because of the new rules. But when you spread that across four houses, that's a different game."
For advisers, the structural pressures building in the buy-to-let market demand a longer planning horizon than a five-year product term. Moustafa said the industry must model the client's position at maturity, the fee in pounds, the balance outstanding, and the refinancing position under realistic adverse conditions. The same discipline applies in bridging, where a bridge exit that depends on the lowest available rate and the maximum possible valuation is not a robust plan.
"The mortgage industry has done an excellent job of keeping difficult cases moving," she said. "But completion is not the same as success."
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