On the back of the interest rate hike, landlords are calling for the reintroduction of mortgage interest relief in full and for housing benefit rates to be unlocked.
Landlords are calling for the reintroduction of mortgage interest relief in full and for housing benefit rates to be unlocked to ease the burden of 13 consecutive interest rate rises. Last week the Bank of England raised interest rates by a 0.5% to 5% as it battles to keep the UK’s persistently high inflation under control.
Inflation is currently running at 8.7%, down from recent months but far above the Bank’s 2% target. But Ben Beadle, Chief Executive of the National Residential Landlords Association, slammed the decision and warned landlords could leave the sector entirely. He says,“85% of buy-to-let mortgages are interest only, which means they are particularly exposed to the impact of rising mortgage costs. Consecutive base rate hikes have seen landlords’ mortgage payments rise exponentially, with some increasing by almost 240% since December 2021 threatening the viability of their businesses. Analysis for the NRLA finds that 735,000 rental properties could be lost across the UK if interest rates peaked at 5%. This will exacerbate the ongoing supply and demand crisis across the private rented sector. It makes no sense to have a tax system that discourages investment in the homes renters need, or benefit payments that fail to reassure vulnerable tenants that they will be able to afford their rents. The Chancellor must take urgent action to support the rental market by reintroducing mortgage interest relief in full and by unfreezing housing benefit rates. This could result in some landlords deciding to offload their assets.”
Matt Thompson, Head of Sales at Chestertons, says "the rate rise will have an impact on overleveraged buy-to-let investors, this could result in some landlords deciding to offload their assets. At this stage, we haven’t yet encountered homeowners who have been forced to sell up but, if rates continue to rise, some owners may be forced to review the situation and weigh up their options.”
Gary Scott, Partner at law firm Spector Constant & Williams, believes that the latest interest rate rise will be a nail in the coffin for many smaller landlords. He says “alongside inflation and the demise of mortgage interest as a tax deductible expense makes being a landlord a burden rather than an attractive investment. “To make matters worse, plans under the Renters Reform Bill to remove no-fault evictions means many landlords will face rent arrears and a long and painful process to evict tenants due to a courts system which is not fit for purpose and is creating delays of over a year to deal with possessions. It is not difficult to foresee that the effect of even a minority of those leaving the market is likely to result in a significant lack of supply driving up rents. Our landlords believe that the sector remains a good investment.”
DOUBLE WHAMMY FOR LANDLORDS Interest Rate Rises AND Section 24
Until the recent interest rate rises started to bite into cashflow, many larger portfolio landlords had taken the decision to pay the extra tax resulting from the Section 24 restrictions on finance cost relief as opposed to restructuring their business. It might be said that the level of pain they were enduring from Section 24 wasn’t enough, but for many more, IT IS NOW!
There comes a point for everyone when they have to admit to themselves “enough is enough”.
These landlords can no longer bury their heads in the sand. Either they exit the business partially or altogether or make other radical changes to the ownership structures of their property rental businesses. Either way, they desperately need some good quality tax advice.
If they sell their rental properties now they could be hit with a huge Capital Gains Tax bill. If they change their ownership structure without professional advice the financial consequences could be even more catastrophic. An age old saying is that “if you think professional advice is expensive, wait until you try using an amateur or advise yourself”.
Since the beginning of this year, the Bank of England has increased base rates from 0.1% to 5%. This equates to an annual loss of £49,000 of cashflow on every £1,000,000 landlords have borrowed. To make things worse, this additional expense can no longer be offset against rental income. Instead, an additional tax credit of just £9,800 (20% of the increased finance cost) is applied, based on the same example.
Some landlords will not have felt the pinch quite yet, because their mortgage interest rates will be fixed. However, when those fixed rates expire they will find themselves in a new World of pain.
'We're facing the four horsemen of the buy-to-let apocalypse': Leading landlord issues a warning as higher rates and taxes squeeze force many out
- Landlords are warning finances are on brink of crisis
- Surging buy-to-let mortgage rates are wiping out profits
- Lenders have withdrawn more than 275 buy-to-let deals and hiked interest rates
Landlords are warning that their finances are on the brink of crisis as surging buy-to-let mortgage rates wipe out profits and force growing numbers to sell at discounts of up to 25%. Lenders have withdrawn more than 275 buy-to-let deals and hiked interest rates by up to 1.57% in just two weeks.
NatWest, Santander, BM Solutions, Fleet, Mpower and Lendco were among a tsunami of firms that withdrew buy-to-let mortgages last week and repriced them at higher rates. A landlord remortgaging now with a typical buy-to-let portfolio would see their costs more than double overnight – rising by around £1,394 a month.
The average two-year fixed rate mortgage is now 6.1%, up from 5.56% at the beginning of last month and 2.96% two years ago, according to rates scrutineer Moneyfacts. Landlords owe around £533,000 in buy-to-let borrowing on average, typically in interest-only mortgages.
Rising costs mean that profits are quickly evaporating – and some landlords are now plunging into the red.
The average buy-to-let property in England and Wales currently generates around £12,000 a year in rental income, according to analysis from estate agent Hamptons. The latest hike in mortgage rates will see average profits fall overnight from £4,490 to £1,780 for a basic-rate taxpayer. Higher-rate taxpayers would see profits almost evaporate, leaving them with just £120 a year after mortgage payments, maintenance costs and tax. Interest rates over 6% will plunge them into the red, according to the firm.
The increasing costs could be the final straw for hundreds of thousands of landlords, who have faced a series of blows to their business in recent years (see timeline below).
Two years ago, landlords' profits were hit as tax relief on their rental income was completely phased out. Last year, tougher rules were introduced for rental properties where there are multiple tenancies. Earlier this year, plans were confirmed to ban no-fault evictions, as well as introduce strict new rules for improving the energy efficiency of rental properties.
Vanessa Warwick, landlord and co-founder of Property Tribes, says "the current situation is like 'facing the four horsemen of the buy-to-let apocalypse'. These are rising mortgage rates, increasing taxation, increasing legislation and an economic downturn."
Paul Shamplina, founder of Landlord Action, addsed 'in the 32 years I've been working for landlords, I've never known their confidence to be as low as it is now."
Why landlords are selling in their droves
David Coughlin, who runs Landlord Sales Agency, which helps landlords to sell out of the market, says "that he has seen some sell their portfolios at 75% of their value just to get rid of them as they are no longer financially viable now rates are rising. They're willing to do a deal just to get properties sold, says David, 53, who is based in Chester. They're more worried about getting the property sold quickly than they are about price.
It's a real problem especially if you need to sell with tenants still in the property – we're seeing landlords accept offers around ten to 15% under what they could get through an agency. Half of the properties he helps landlords to sell go to other landlords who are less worried about mortgage costs. The other half are usually sold to first-time buyers. 'Increasingly it's companies buying up portfolios of buy-to-lets and some think that now is the time to buy."
The rises that spell pain for tenants
Rising mortgage rates are quickly translating into higher rents for tenants. Landlords are trying to pass on their increased costs, while a falling number of buy-to-let properties means tenants are competing for a smaller pool of options. The average rent on new rentals rose by 9.1% in May compared to the previous year, according to lettings agency Hamptons. Average monthly rent hit £2,500 in London and a record high of £1,190 for the rest of the UK, according to property portal Rightmove.
Bert Habib, 54, a landlord and investor, recently let a two-bedroom flat in North London and says "renters were fighting over it. It was genuinely shocking, there were more than 50 tenants wanting to take it and offering crazy high rents to get it. I really feel for them but at the same time, there are landlords who can't even cover the mortgage it's got so bad."
Some tenants have seen their rent raised multiple times over the past year. The rising cost of living means hundreds of thousands cannot absorb further rent rises and so landlords will struggle to pass on extra costs to them. Chris Norris, at the National Residential Landlords Association, addsed 'in the first quarter of the year, one in three private landlords in England and Wales said they planned to cut the number of properties they rent out. It's at the highest level we have ever seen, leaving many more renters struggling to find a place to live. We need a thriving rental market to meet the needs of ever-growing numbers of people."
Wave of remortgaging is going to hurt
Jonathan Samuels, 45, a landlord with ten buy-to-let properties, says "a huge wave of landlords are going to have to remortgage this summer and many could struggle. That's because thousands of additional buy-to-let properties were bought to beat the stamp duty holiday, which was introduced during the pandemic and ended in August 2021. In August, 2021, the average rate on a 75% loan-to-value mortgage was 1.8%. Many landlords who bought before the stamp duty holiday will be coming off these deals and remortgaging on to new ones at over 6%."
However, Jonathan is staying in the market and believes that for landlords with a good amount of equity, the current climate represents a good buying opportunity."If you've plenty of equity, higher rents mean it's relatively straightforward to remortgage," he says.
Professional landlord and company director Bert Habib says that many landlords he speaks to are trying to get out of the market because there are too many rules and regulations for them to keep up with.
Bert, who is based in North London and owns around 30 buy-to-lets in both London and Birmingham, says, 'I've been in this market for 25 years and for those of us who bought in early, it's been a really good investment – especially because mortgage rates have been so low until recently. It's much harder for newer landlords though, as there are very few opportunities to buy where the yield is worth it.'
How much landlords will have to raise rents by to still make a profit
Landlords would need to raise rents by £614 a month in London and the South East to remortgage at current rates without making a loss. Rents would have to increase from £1,498 to £2,112 a month – a jump of 41% according to Hamptons estate agents.
Many landlords will sell up as they will be unable to raise rents to such an extent, experts have warned. The average two-year buy-to-let mortgage rate has reached 6.44%, while five-year deals are at 6.31%, according to data company Moneyfacts. Two years ago, the average two-year deal was at 2.96%.
Chris Norris, of trade body the National Residential Landlords Association, said "we’re seeing lots of people talking about exiting the market at the moment because they’re not able to increase the rent – they don’t feel it’s right or sustainable to increase the rent by the amount they would have to. If you’re talking about 30 or 40%, that’s not sustainable. The option you’re left with is to dispose of that property and to exit.”
Half of rental properties sold by landlords are in London and the South East, according to property website Zoopla.
Mr Norris said "other landlords are having problems remortgaging when they come to the end of their cheap fixed-rate deals because they can no longer pass stress tests for new mortgage products. To get a buy-to-let mortgage, basic-rate taxpayers and limited companies need to show that the rental income covers 125% of the repayment costs. For higher-rate taxpayers this metric known as an “interest coverage ratio” (ICR) is set at 145%. Properties with an ICR below 110% will become unmortgageable and could be moved on to more expensive standard variable rates."
Rents can be increased to meet these standards, but there is a limit to how much more tenants can pay. In the past year, rents have already surged by 10%, according to Zoopla. In London and the South East, they have increased by 14% and 9% respectively.
Rents have risen faster than pay for 21 consecutive months and now take up 28% of earnings before tax.
Dan Wilson Craw, of campaign group Generation Rent, said “we’re hitting the limits of what is affordable for tenants.”
Rental affordability is at its worst level for a decade in seven of the 12 regions of the UK, according to Zoopla. Across Britain, 28% of all landlords face losses if they do not raise rents, accounting for 40% of landlords with mortgages, according to Hamptons.