Buy-to-let: landlord profits slashed amid mortgage and rent chaos

Updated on 05 December 2022 | 0 Comments

Estate agents report landlords looking to sell up as a result of mortgage and rent situation.

People who invest in property face seeing their profits crash to just a couple of pounds a year, new data has revealed.

Analysis from Hamptons, reported in the Telegraph, make it clear just how dramatically the situation has changed for landlords.

It noted that a landlord who purchased a buy-to-let property for £183,000 in 2020, on a 1.89% mortgage deal, would have paid around £2,261 each year in mortgage repayments. With a typical rent, this landlord would end up with a post-tax profit of £2,526.

However, the recent turmoil in the financial markets has meant that mortgage rates on all kinds of deals have shot up substantially.

As a result, that landlord would likely pay a rate of around 5.14% when remortgaging, which would mean their mortgage payments would triple to around £7,127.

As a result, their profit would shrink to a laughable £7.

Hamptons found that this issue is likely to be more pronounced in certain areas, where house prices are higher and therefore the cost of remortgaging will be even bigger.

Indeed, it suggested that in five out of the 11 regions of the UK, rental properties would end up being loss-making.

For example, its analysis suggested that the typical London landlord could lose the best part of £4,000 on each property after remortgaging.

Record rents

This situation is particularly notable given the way rents are increasing.

A separate study, again from Hamptons, has found that the average rent on a newly let home has increased by 7.1% over the last 12 months to a new high of £1,204 per month.

That’s up by £80 per month, or £960 per year, on the same point a year ago.

In London, rents have passed an average of £2,100 per month, an absolutely staggering amount.

These rocketing rates mean that the average privately rented household now hands over around 44% of their post-tax income on rent.

That’s increased by five percentage points over the last decade.

At a time of such high inflation, this is honestly terrifying.

Addressing the ratio

This situation risks leaving buy-to-let properties being completely unmortgageable.

When you apply to a lender for a buy-to-let mortgage, one of the key considerations is the interest cover ratio.

Essentially it’s how the rental income from the property compares to the interest payments on the outstanding mortgage.

Generally, lenders want to see a ratio of at least 145%, meaning the rent is effectively one and a half times the interest.

That was simple enough to achieve a couple of months ago, but with the rate hikes we’ve seen it may be far harder to manage without pushing rents up sharply.

If landlords aren’t willing to do that, then they may find they are simply unable to raise the funds needed, and so may choose to sell up.

This isn’t the answer

There is undeniably a housing crisis in the UK. House prices have rocketed at a rate that is little short of farcical for years, making homeownership far more difficult for this generation of first-time buyers.

So there is a part of me that thinks there could be some good to come out of this situation.

If landlords sell up, then would-be buyers will have a greater range of properties from which to choose, while that increase in supply should help bring prices down somewhat. That could make a real difference to some of those hoping to purchase a home.

But I fear this is too simplistic. The reality is that the mortgage market turmoil hasn’t only hit landlords, it’s hit buyers of all kinds.

There will be people who might have just about been able to afford a mortgage a few months ago, but simply cannot manage it today, particularly given the rising cost of everything else.

It also overlooks the short-term issue. If whole swathes of landlords are selling up, that means an awful lot of tenants may be about to find themselves homeless.

They may not be in a position to get a mortgage ‒ or even want to ‒ and so face a bunfight in order to secure the remaining properties which are being let out.

There is a real ticking timebomb below the rental market at the moment, with the only question seemingly when it will go off.


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