As a landlord, your property’s yield is an important figure. It indicates the level of return your property investment is generating and can be used to track the performance of your property over time so that you can compare it with other buy-to-let properties and market averages, as well as other types of financial investment.
Generally speaking, because house prices vary more than rents in different parts of the UK, properties in more expensive areas (e.g. London and the South of England) tend to have lower rental yields but grow better in value, while those in more affordable locations (e.g. the Midlands and North of England) have higher yields but don’t benefit from such good capital growth. It’s a trade-off, so while those more focused on long-term capital gains might be less interested in the yield figure, landlords who rely on getting monthly income from their investment find yields more useful.
How have yields changed over recent years?
During the early part of the pandemic and until the middle of last year, average house prices were rising well, but so were rents, so gross yields were pretty stable. Increasing rental income meant many landlords could maintain their profit levels, despite the increasing cost of living.
According to Paragon Banking Group, in Q4 of 2020, the average gross yield in England was 5.8%, ranging from 5.1% in Central London to 6.4% in Yorkshire & Humber and the East Midlands. Almost two years later, in Q3 of 2022, there was very little change despite some fluctuation in the interim: England’s average was at 5.8%, ranging from 5% in Outer London to 6.3% in the North East and Yorkshire & Humber.
Meanwhile, Rightmove’s rental price tracker for the second quarter of this year across the whole of the UK shows average yields varied from 5.3% in London to 8.3% in the North East of England, with all regions – as well as Scotland and Wales – up slightly on 12 months previously.
However, while gross yields are doing well, landlords with mortgages are now likely to be seeing their net yield drop. Since the Bank of England base rate started rocketing last August, mortgage lenders have followed suit, and this year we have seen mortgage interest rates climbing to their highest for 15 years. In July, the rate for a typical 2-year fixed deal rose to 6.66%, according to Moneyfacts – nearly three times what it was at the end of 2020, meaning monthly payments could have nearly tripled for some landlords, which could wipe out their profits entirely. If they cannot increase their tenant’s rent and reduce other costs, they may even have to subsidise their investment.
For example:
Although the annual costs have increased, the property has still delivered well from a capital growth perspective, and as rates are forecast to drop in the future, mortgage costs are likely to reduce in the future.
This demonstrates the importance of planning ahead and stress-testing your figures when you make a buy-to-let investment or when there are significant changes, such as mortgage rates. You should always know where your break-even point is and constantly track your income and expenditure so that you can anticipate a financial squeeze and take steps to mitigate it.
Ways to increase yield?
For instance, you could increase your tenant’s rent (bearing in mind that you can typically only do that once a year) – and if you have a change of tenancy, you may be able to make a more significant increase. In terms of the mortgage, you could use other capital to pay down your buy-to-let borrowing, and if your property has increased in value well since you bought it, you may be able to refinance at a lower LTV and get a better interest rate.
If you purchase a property at below market value or find a way to add value, these strategies can help boost your yield, as can renting individual rooms instead of a whole property and doing things like paying off a lump sum of your mortgage to reduce your Loan to Value.
Buy to let returns plummet for landlords as mortgage rates soar
The average yearly returns on a rental property in the UK have fallen by more than £4,000 in June 2023, compared to the same month last year, research reveals. The data from finder.com analysed monthly average buy to let mortgage rates, house prices and rent prices to find how much a landlord would make from renting out a property after paying interest.
The result is that a landlord who took out a two-year fixed rate buy to let mortgage in June 2022 would earn an average of £609 per month from rent, or £7,312 over a year.
However, a landlord who took out the same mortgage in June 2023 would only earn an average of £250 per month, or £2,995 over a year.
That’s a whopping 59% less in monthly returns and a £4,317 drop in yearly income.
Trend of landlords pulling out of the buy-to-let market
Kate Steere, a mortgages expert at finder.com, said “we’re seeing a trend of landlords pulling out of the buy-to-let market as consecutive base rate hikes have made it unprofitable for them to continue. This will have a worrying impact on an already competitive rental market, leaving renters with fewer options and rising costs as they attempt to navigate the cost-of-living crisis.Even though we’ve seen house prices start to come down, and 40% of experts from our recent panel believe a housing market crash is on the horizon, any landlords who are coming off a fixed rate now will no doubt be put off by the staggering mortgage rates which are now over 6%, compared to less than 2% two years ago.”
Decline in landlord income
The main reason for this decline in landlord income is the rising cost of borrowing which has pushed up mortgage rates for both residential and BTL borrowers.
The average buy-to-let mortgage rate for June was 5.45%, while the average rate for July reached 6.18%. These are the highest rates since the financial crisis of 2008. Meanwhile, house prices have not fallen enough to offset the higher interest payments.
The average UK house price in June was £287,546, according to the ONS house price index.
This is only 1.6% lower than the average price in September 2022, when it peaked at £292,344.
BTL property investment is less attractive
The combination of higher mortgage rates and lower house prices has made BTL property investment less attractive.
The latest figures from UK Finance show that the value of BTL mortgage lending in the UK fell by 40% to £5.8 billion in the first quarter of 2023, from £9.7 billion in the previous quarter. The number of loans granted also fell by 44% compared to the same period last year.
Finder.com says "this trend could have serious implications for the rental market, as fewer landlords could mean fewer properties available for rent. That scenario would drive up rent prices and make it harder for tenants to find a home. Also, the move could affect the overall housing market, as less demand for BTL properties could lead to lower house prices and reduced market activity."
Exodus of PRS landlords picks up pace
There are signs that a potentially larger-than-anticipated property sell-off among the nation’s landlords is underway, Bloomberg reports. Using an analysis based on capital gains tax receipts compiled by real estate firm Savills, the figures will prompt concerns about the UK’s rental sector.
The data shows the number of rented homes being sold surged from 22,000 between February and March, to 25,000 between April and May. Also, HMRC has recently revised upward the disposal figures for the 2021/22 tax year by 8.5% to 153,000 – which may indicate that landlords have been selling up earlier than previously thought.
The consultancy firm TwentyCi has also noted a big decline in rented home availability with numbers hitting a 14-year low in June – which also points to a landlord sell-off.
‘Greater number of buy to let landlords selling up’
Toby Parsloe, a research analyst at real estate firm Savills, told Bloomberg “the rise in residential disposals in capital gains tax receipts does point to a greater number of buy to let landlords selling up. This trend started earlier than previously thought, picking up pace since the market opened again in June 2021 after Covid. For many landlords it simply isn’t worth it anymore, increasing the very real risk that more will be looking to exit the sector.”
While Savills’ forecasts suggest that landlord property sales are indeed rising, the reported disposals are still below the total seen in the two months following last September’s mini-Budget.
Landlords are also navigating a complex terrain
As tenants grapple with a cost-of-living crisis, landlords are also navigating a complex terrain which includes higher interest rates and rising costs. As rates rise, landlords with interest-only mortgages are vulnerable with many facing a tough decision – sell up or raise rents to pay the higher costs. Savills says that since landlords pay CGT on any gains when they sell a property, this is an indicator for BTL sales because a property that isn’t a main residence has CGT due within 60 days.
However, BTL landlords who manage their properties through limited companies are exempt from capital gains tax – which means even more landlords could be selling than official data suggests.
The experts at Savills say the monthly CGT receipt data shows that in the 2022/23 financial year, there were 151,000 home disposals. That’s the second highest on record, trailing closely behind the preceding tax year with 153,000 disposals.
But Hamptons last week had bad news for landlords selling up – it appears they have missed the top of the market and profits are £10,000 down on this time last year – and 6% of landlords sold at a loss.
Sweeping Tax Reform for Landlords - six key demands
Sweeping tax changes for landlords have been demanded by letting agents group Propertymark. The group has analysed the impact of changes using data from members and other private and public sector organisations. The aim is to highlight the detrimental impact government decisions have had on the tax and financial situation for landlords and which is contributing to a serious lack of available rental properties.
Propertymark spells out how landlords are so heavily taxed in a new paper.
- Under stamp duty land tax rules in England and Northern Ireland a buy-to-let landlord purchasing an additional property for £290,000 (average UK house price) can expect to pay £10,700 in stamp duty, when a main resident would only pay £2,000;
- In Scotland, land and buildings transaction tax on an additional property valued at £185,000 (average house price in Scotland) would be £11,900 for a by-to-let investor with a main resident only paying £800;
- The situation in Wales is even more stark, as a buy-to-let landlord would pay nearly £10,000 in land transaction tax for an additional property, based on an average Welsh house price of £215,000, when a main resident would pay nothing;
- A significant change since 2016 has been the Capital Gains Tax for individuals owning property. In March 2016, rates were cut significantly for top-rate taxpayers from 28 to 20 per cent and from 18 to 10 per cent for lower earners. However, landlords were excluded from the cuts meaning that while the sale of shares in a company that owns the property would incur Capital Gains Tax at 20 per cent, individuals making reasonable gains on the sale of a second property would face the existing 28 per cent.
Other burdens include a reduction in the available tax relief on mortgage interest costs and the removal of the 10 per cent wear and tear allowance for fully furnished properties making these cumulative changes result in a system with limited opportunities for small investors because the ability to offset finance costs against tax liabilities has been eroded.
Furthermore, Propertymark insists there is little incentive to upgrade existing rental properties because repairs and maintenance are tax deductible, but improvements are not.
So the group sets out a series of demands for reform:
- Review taxes that apply to private landlords - Develop policies that promote long-term investment and reduce costs for tenants.
- Reinstate mortgage tax relief - Level the playing field between landlords operating in their own name (who are subject to the tax changes) and those who are set up as a business (who are not).
- Reduce taxes on additional properties - Existing surcharges must be reduced and could be split so a lower percentage is paid by landlords looking to invest in the private rented sector and a higher percentage is paid by individuals buying second homes.
- Bring back tax relief for energy efficiency - Help landlords with the cost of energy efficiency work and ensure that tenants benefit from lower bills.
- Reduce CGT thresholds - Align residential property with other asset classes and remove the disincentive to invest.
- Avoid rent controls - Flexible tenancies and rent prices driven by market forces have led to the success of the private rented sector across the UK.