Over recent years, as successive governments have tightened lettings legislation and increased the tax burden on landlords, some with investment properties have reduced their profits.
Now, with the cost-of-living crisis, mortgage rates at their highest level for well over a decade and the Renters (Reform) Bill making its way through Parliament, some landlords are understandably beginning to wonder if it’s still worth having a rental property.
That decision is a very personal one, which will depend on the following:
- Your cash flow: month on month, does your property still deliver the profit you want or need?
- Your financial objectives: are you dependent on monthly profit to supplement your income, or have you invested more for long-term gains?
- What would you do, and how would you secure a return on investment if you sold your properties?
If you went into buy-to-let with the intention of holding the property for the long term, it’s likely that the property will still deliver good returns over time versus or alongside other types of financial investment. So, if you’re not dependent on a certain level of monthly profit, it may just be a case of riding out any short-term reduction in cash flow.
How are prices and rents doing?
As far as rental income is concerned, the figures are currently robust. Average rents continue to rise in most areas, and year-on-year increases have again hit record levels since the series began in 2006.
For the 12 months to May this year, ONS data shows:
- England +4.7% (excl. London)
- Wales +5%
- Scotland +5.4%
- N.Ireland +10% (year to March 2023)
And data from Zoopla shows that rents for new lets increased by 10.4% in the year to April (9.1% excl. London).
But will and can this level of growth continue?
Average UK rents as a percentage of earnings are now at their highest level for more than a decade (28.3%, versus a 10-year average of 27%); nevertheless, more than half of renters are reporting that paying their rent is ‘somewhat’ or ‘very’ easy, with only 15% saying that it’s ‘very difficult’.
In addition, spending 30% of earnings is considered affordable, so ‘on average,’ there is still some room for rents to rise more, but this is very location specific. As a result, we expect rental growth to slow but certainly not stop – particularly given the ongoing chronic supply shortage versus demand in most of the UK. Looking at average property prices, although Zoopla reported in June that sellers had to accept offers that were, on average, 3.8% below the original asking price, we have to view that in the context of the excellent house price growth that we’ve seen over the past few years.
Rightmove has reported that asking prices went up by 6.3% in 2021 and by another 5.6% in 2022, and their data for the last five years shows the average asking price has increased from just under £310,000 in June 2018 to around £375,000 in June 2023. So, even with prices predicted to fall by up to 5% by the end of 2023, most landlords should have seen good enough growth before the pandemic for that not to be an issue. Of course, property investors have to appreciate that the market has cycles and doesn’t just keep going up without a break!
So, in terms of rental income and capital appreciation, the figures look good, but what’s undoubtedly proving an issue for many landlords is increased expenditure. General inflation means the cost of maintenance, repairs and other goods and services relating to the operation of rental properties have risen, and those who have buy-to-let mortgages will either already have seen monthly payments increase or will do when they next refinance. Around 40% of landlords own all their properties outright, while 24% own some outright and others with a mortgage.
Only a third have mortgages on all their properties.
The same report suggests that the average non-portfolio landlord has mortgage borrowing of around 55%. In comparison, it’s just 44% for landlords with four or more properties – and with that kind of equity, landlords should be able to access relatively reasonable interest rates. And our own Landlord tracker revealed in June that Landlords generally remain optimistic about the market: 68% plan to maintain their portfolio, and 6% plan to expand it.
So, broadly speaking, even though mortgage rates are currently rising, the majority of landlords may not find their profits too badly impacted.
What about the Renters (Reform) Bill – is it bad news for landlords?
Our view is that the vast majority of landlords, who already let in a very professional manner and look after their property and tenants well, shouldn’t be negatively affected as and when the Bill passes – assuming the contents don’t change much. This has been reinforced by our own Landlord research, which suggests that “The majority said that the Renters Reform Bill does not affect their approach to property investment.
Asked, ‘Will the bill change your approach to property investment?’, 40% said ‘no’, compared to 33% who said ‘yes’ (27% are currently undecided).”
There will be a fee for signing up to the Ombudsman and the new portal, but the Government has made assurances this will be ‘proportionate and good value’. We don’t anticipate the other changes – even the removal of Section 21 evictions – will make a considerable difference to landlords, who rarely choose to evict a tenant without a good reason, and that’s still going to be possible under strengthened Section 8 grounds.
But if you are still unsure whether to hold on to your rental property/ies or sell up, here are five steps that should help you make a decision:
- Check your cash flow. Put together a detailed breakdown of all your ongoing expenditures – and for annual costs such as the gas safety check, average the cost over 12 months – and check that your property/portfolio is still making money.
- Know the property’s current value. Check what capital growth you have had recently, as this may compensate for any loss in income or monthly profit. You can get a rough idea by looking at the price of similar properties online, but for a much more accurate market valuation, just get in touch with your local branch, and we’ll be happy to visit and appraise the property.
- Work out your break-even point based on 7-8% mortgage rates. Currently, two and five-year fixed rates are available at around 5-6% (int. only), based on 65-75% LTV, but reverting to a standard variable rate of 8-9%. So calculate how much you would be paying with your current level of borrowing if rates rose to 7-8% – would you still be making an acceptable level of profit, or could you finance any losses until mortgage rates fall?
- Could you refinance at a lower LTV? If your property has increased in value significantly since you last remortgaged, you may be able to secure a better interest rate by refinancing at a lower LTV. That could mean your mortgage costs stay about the same or fall, even if your borrowing doesn’t change.
- Is the property still meeting your investment objectives? For example, if your investment priority was capital growth so you could realise a lump sum for your retirement, as long as the property still covers its costs, there may be no pressure to sell.
Of course, regardless of what’s happening to average prices and rents across the UK, local markets can vary wildly – even from one end of town to the other.
So, before making any decision, we’d recommend you speak to local property experts, to understand exactly what’s happening in the immediate area and what we believe is likely to happen to the rental market over the coming months.
The World Has Changed for Landlords. It’s Time to Adapt.
Whether you are a first-time property investor with a buy-to-let or two, or a seasoned landlord with an established portfolio, being a landlord in the current property market is no easy feat. The combination of economic uncertainty, interest rate increases, rising mortgage costs, and impending regulatory changes has left many landlords wondering about the future of their investments. Amidst this evolving context, landlords need to secure their financial future.
The latest interest rate increase by the Bank of England, the 14th one in a row, has added to the uncertainty for landlords. With rates at their highest point in nearly two decades, the cost of buy-to-let mortgages are putting pressure on landlords, making it essential for them to seek efficient ways to maximise rental income and reduce expenses.
Furthermore, the Renters Reform Bill is set to bring significant changes to the rental sector.
While it aims to improve the rental experience for tenants, landlords must navigate potential implications that could affect their rental income and property management practices. With new regulations potentially reshaping the rental landscape, landlords must also be prepared to adapt to the changing regulatory conditions.
There are two leading residential property investing strategies for landlords:
Rental income: This is where the income generated by renting the property exceeds the total costs of financing, letting and maintaining the property.
Capital appreciation: The goal of this strategy is to purchase a property with the expectation that its market value will appreciate significantly in the future, allowing the investor to profit from the sale of the property at a higher price.
Given the current backdrop, both strategies are at risk of failing to meet the investment objectives of landlords and property investors.
This is evidenced in research published by the National Residential Landlord Association (NRLA) and research consultancy BVA-BDRC who announced that one in three (33%) of private landlords in England and Wales planned to reduce their portfolio, an all-time high.
With this grim picture, is there any hope for landlords?
Landlords are scouring the market for services to augment their strategy with rental advances, shared-cost property renovations, longer-term leases, maintenance plans and even self-management rental platforms. These may provide some relief but do not solve the immediate and existential challenges facing landlords.
Market challenges could prove too much for landlords, warns expert
Property and tax expert, David Hannah outlines the issues that make the UK rental market less attractive for landlords. Soaring mortgage costs, diminished profits and government red tape could all adversely impact the UK rental market, encouraging landlords to sell up and leave the sector.
Group Chairman of Cornerstone Group International, David Hannah has outlined the issues facing the market in a frank appraisal.
Hannah said that "300,000 buy-to-let properties going onto the property market in early 2023 signalled an exodus of Britain’s buy-to-let landlords. This came, amid the government’s introduction of costly Energy Performance Certificate (EPC) changes, alongside its proposal of the Renters Reform Bill. Further pressure on landlords was coming from the increasing costs of mortgage deals."
He referenced a report from the English Private Landlords Survey, indicating that 60% of landlords across the nation had a buy-to-let mortgage and were subject to soaring rates as a result. He also believed "this could be the final nail in the coffin for landlords who had already seen their profits hit rock bottom – and, as such, an uncertain future for the rental market. Rising rental costs in the UK are creating a dire situation for tenants, especially those on lower incomes,” Hannah said. “With the highest share of pre-tax income spent on rent in a decade, and average rents surging by 10.4% annually, affording rental properties has become increasingly challenging."
Lawyers warn that Renters Reform Bill will reduce supply
A law firm says the Renters Reform Bill is driving buy to let investors to quit because of their fears over Section 21 abolition. Bishop & Sewell LLP says it’s seen a significant rise in enquiries from landlords seeking to sell.
Charlie Davidson, senior associate with Bishop & Sewell’s Residential Property team, says “the proposed Bill promises to be the biggest shake up to the private rental sector for a generation, bringing in new laws to protect renters from no fault evictions to ensure a better deal for renters. However, the changes to Section 21 are causing landlords particular concern, as they will face additional obstacles to removing tenants when they come to selling the property. Many landlords oppose the Bill and, when coupled with the impact of higher mortgage costs and soaring energy bills, buy to let landlords in particular are considering exiting the market in their droves. This could inadvertently reduce the supply of rental properties and increase costs for renters, which is far from the Government’s intention. Meanwhile, mortgage lenders prefer it if landlords can readily regain possession of their properties, so any reforms that reduce landlords’ flexibility and freedom to recover capital could dampen their willingness to lend. It’s fair to say the buy to let market faces some significant challenges, including proposed renter reforms, the Building Safety Act and rising mortgage and energy costs. The danger is that the very reforms designed to help renters end up squeezing out investors from the buy to let market, with all the potential for disruption to supply and rents that could bring.”
Landlords disproportionately hit by repossessions as lenders force more into the red
Landlords are more likely to have their properties repossessed than live-in homeowners, as mortgage lenders’ new higher rates push increasing numbers into the red. In the first three months of this year, a third (35%) of all repossessed properties were owned by landlords. Arrears for this group jumped 33pc, compared with just a 5% uptick for live-in homeowners, according to UK Finance.
Some landlords are being forced to roll onto their lender’s SVR if they do not offer product switches. These are more expensive than fixed-rate deals, averaging at 8.45%, according to Uswitch.
Currently, buy-to-let customers looking to remortgage need to be able to afford a future interest rate of between 9% and 10%, depending on their tax situation. This is out of reach for swathes of landlords, rendering them unable to remortgage. If a product switch is not available, landlords have just two options left, according to brokers – they can either increase their tenants’ rents further to afford the SVR, or lose the property (be that through a forced sale or repossession).
In England, there are 8.8m mortgages tied to live-in homeowners, and 2 million mortgages tied to buy-to-let investors.
Telegraph analysis shows that, despite buy-to-let properties making up 19% of all mortgaged homes in England, landlords were disproportionately affected by repossessions earlier this year, accounting for 35% of all repossessions between January and March, or 410, of all 1,160 repossessions earlier this year.
During the same period – between January and March – live-in homeowners accounted for just under two thirds (65%), or 750, of repossessions despite making up a greater 81% of mortgaged homes. Paul Shamplina, of legal firm Landlord Action, said "he has seen a massive increase in instructions from landlords serving Section 21 notices to tenants in order to sell their properties. Landlords are struggling with rising mortgage costs. We had one landlord whose buy-to-let mortgage went from £350 a month to £1,100 a month. Landlords staying in the market and coming off a fixed rate to a standard variable one are having to increase their rents, meaning many tenants are having to swallow rent rises in the midst of a cost of living crisis.”
The majority of buy-to-let mortgages held by landlords are interest-only, which a spokesman for the National Residential Landlords Association (NRLA) said made them particularly exposed to rising rates. They added: “This is putting many in a difficult position, with a choice of increasing rents to cover growing costs or leaving the market altogether. Much more needs to be done to ensure the private rented sector does not shrink as costs continue to grow. Without urgent action there is a real risk that more renters will be faced with misery as they fail to find high-quality privately rented accommodation.”
The NRLA is currently campaigning for the reintroduction of mortgage interest relief, and for housing benefit rates to be unfrozen.
Mortgage trap facing some landlords
Specialist buy-to-let lenders such as Landbay have not offered product switches to landlords for some time. But some building societies have more recently withdrawn the option – Newcastle BS being one.
While the former says funding lines make providing the option tricky, the latter says it is responding to more recent market volatility. Mortgage broker David Gissing, of LDN Finance, said "some landlords whose fixed-rate deals are ending have found the rents they charge are not enough to cover the stress test for a new fixed mortgage with an interest rate over 6%. Making things worse, lots of lenders aren’t offering rate switches for existing buy-to-let customers This means standard variable rate payments will be more than the rent received.”
Product – or rate – switches do not require an affordability assessment, whereas remortgaging does.
One landlord client of Mr Gissing’s had not increased their tenants’ rent for six years. They have now increased the rent by £300, and it still is not enough to cover lenders’ new affordability requirements. He said: “Even if a rate switch was allowed at 6%, it would still ‘wash its face’. So, as a landlord, do you sell or increase the rent again?
“Lenders are effectively forcing a decision and not being flexible with rate switches.”
This particular client’s tenants have lived in the property for nearly ten years.
Asked why landlords do not have reserves to cover these increases, Mr Gissing said "many have been using their profits to reduce their outstanding mortgage balances."
Mortgage broker Aaron Strutt, of Trinity Financial, said "standard variable rates are “shockingly bad”. Many people will be unable to remortgage or switch to a cheaper rate. In effect, they will either be stuck or forced to sell.”
Paul Brett, managing director of intermediaries at Landbay, said "existing borrowers looking to remortgage can do so at beneficial rates. We refer to this facility as a ‘loyalty remortgage’, rather than a product transfer, due to technical constraints and how we are funded. The remortgage does require a new survey. We have one of the lowest ‘reversion’ interest rates in our sector of the market and for landlords coming to us, where perhaps a product transfer is not available, we offer a ‘like for like’ remortgage facility at better interest coverage ratios than they could normally obtain.”
Newcastle BS has cited “the current volatile nature of the mortgage market” for why it has withdrawn its product switch option for existing buy-to-let landlords.
The lender said it was in the process of relaunching a range of product transfer options for buy-to-let customers. They added: “We contact all customers with maturing products ahead of their mortgage products coming to the end, and issue a number of reminders with updates on new deals prior to their mortgage term ending to ensure they get the best possible deal. This means all buy-to-let customers with a product due to end will be contacted with details of the new product range. In addition to this, our SVR is one of the most competitive on the market, at 5.94%."
Is another interest rate rise really bad for landlords?
With interest rates on the rise, landlords may face some challenges, particularly those without fixed mortgages. However, amidst the potential uncertainties, there are also opportunities that can be harnessed within the Private Rented Sector (PRS).
One immediate benefit is the increased demand for rental properties. As interest rates fluctuate, the housing market remains unpredictable and supply continues to fall, more people are opting to rent rather than buy. For landlords with vacant properties, this presents a golden opportunity, when looking for tenants, to attract and cherry-pick the best-suited candidates for their properties. They can also set the rent at current market rates, potentially boosting profits.
For landlords with existing tenants, the interest rate rise can be seen as an opportunity to increase rents. In the past, many landlords have been hesitant to raise rents. This stems often from a misplaced loyalty and fear of potentially rocking the boat with existing tenants. Unfortunately, the consequences of leaving rents unchanged for long periods really come home to roost at times such as these. However, with the current saturation in the rental market and soaring property prices, tenants will find it challenging to find comparable properties at similar rates. This situation also provides landlords with a lower risk of tenant turnover.
While there is a moral obligation to treat tenants fairly, it’s crucial to remember that renting property is also a business. Landlords need to balance ethical considerations with financial realities. A well-managed rental property can provide a steady income stream and contribute to long-term financial stability.
In conclusion, whilst an interest rate rise can bring a lot of negative consequences for landlords in the PRS, it also offers opportunities to attract tenants and potentially increase rental income. As the rental market continues to evolve, landlords must carefully assess the situation, navigate through challenges, and strike a balance between being fair to tenants and ensuring their business remains viable.