As a rising number of landlords face higher rates when their mortgage deals expire, buy-to-let investors across the UK are now collectively paying £15bn in mortgage interest annually, new research shows.

According to Hamptons, which supplied the figures, this up 40%, or £4.3bn, over the last 12 months and 58% (£5.5bn) 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. The hike 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.

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%. However, the total amount of mortgage interest paid fell by 3% over the same period, driven down by falling interest rates.

The increase in borrowing by landlords predominantly was not 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 £15bn 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% in August. However, if this rate hits 4.0%, landlord’s total annual mortgage interest bill will reach £17.9bn. At average rates of 5%, it will hit £22.4bn and at 6.0% rates, £26.8bn.

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

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% around 43% of rental income paid to mortgaged landlords will be spent paying mortgage interest, rising to 54% at 5.0% rates and nearly two-thirds (64%) at 6.0% rates.

Annual rental growth across Great Britain remained in double-digits during September, with the average cost of a new let up 11.7% on the same period 12 months ago. This is the second fastest increase on record, surpassed only by August’s figure of 12.0%. The average rent in Great Britain now stands at £1,325pcm, up from £1,186 in September 2022.

Rents are rising faster in London than anywhere else. The average cost of renting a property in the capital was £322 pcm or 15.7% more expensive than it was at the same time last year. Both Inner and Outer London recorded double-digit rental growth, but rents in Outer London (16.2%) rose faster than anywhere else in the country. The average Outer London rent last month (£2,241pcm) was higher than the average Inner London rent two years ago in September 2021 (£2,186pcm).

Source: Hamptons

Nationally, rents are increasing at a double-digit pace in most regions. However, the rate of growth slowed slightly from last month, with rental growth in the fastest-rising regions dipping. Southern England and Scotland bucked this trend, with rental growth continuing to accelerate from an already high level.

Aneisha Beveridge, head of research at Hamptons, said: “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 £20bn 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.”

“A decade of cheap money and rising house prices encouraged many landlords to remortgage and extract cash out of their buy-to-let when remortgaging. Our analysis suggests that most of this money wasn’t reinvested back into buying rental homes and was invested elsewhere or used to help their children buy their first home. Rising rates will reverse this flow of finance, pulling cash out of the economy and back into the housing market as investors look to pay down their debt instead.”