Landlords will lose money by next year as buy-to-let Britain falls apart

Buy-to-let yields have hit a record low, fuelling fears that property investors will sell up. Landlords could soon turn a loss as higher interest rates bite, while the Government’s buy-to-let tax crackdown further amplifies the pain of soaring mortgage costs.

Nationally, gross rental yields are already at a record low of 4.38pc. This is because house prices have climbed more quickly than rents.

Research consultancy Capital Economics has forecast that by the end of 2022 yields will hit a new low of 4.26pc. As interest rate rises push up landlords’ outgoings, next year the margin between rental income and mortgage costs will become the most squeezed it has been since the financial crisis.

The Bank of England’s decision to increase the Bank Rate to 1.25pc will cause the average net profit on a new buy-to-let property to fall by 15pc for a landlord who pays higher-rate tax, according to Hamptons estate agents.

In London an investor who pays higher-rate tax will see their net profit fall by £840 a year – 29pc less than before the rate rise.

“It will only take the Bank Rate to reach 2pc before the average landlord on higher-rate tax would see their profit more than halve,” said Aneisha Bever­idge of Hamptons.

Capital Economics has forecast that the Bank Rate will hit 3pc next year, but a typical buy-to-let will be loss-making much sooner.

An average landlord on the higher rate of tax will see their investment turn a loss if the Bank Rate hits 2.75pc. At this point, a typical buy-to-let mortgage rate would be 4.11pc, meaning they would lose £97 per property per year. At 3pc, their annual losses would jump to £403.

London landlords will be hit hardest, said Ms Beveridge. “Here, profits would fall by 59pc if the Bank Rate rose to 1.5pc,” she said. If interest rates rise to 2pc, a typical London landlord will lose £501 a year per property. At 3pc, the yearly loss would be £2,180.

The Government’s buy-to-let tax crackdown is key. Previously, landlords could deduct their mortgage costs from their tax bill. This was scrapped in phases from 2017. Since April 2020, landlords have received only a 20pc tax credit on their mortgage interest payments. This means rising mortgage costs now hit landlords’ net profits much harder.

Demand from investors will drop off as they turn to alternative investments, according to Andrew Wishart of Capital Economics. “This is another good reason to think house prices will decline until rental yields look more attractive,” he said. The wholesale exodus of landlords from the market would force down house prices.

Michael Gove, the Housing Secretary, has also begun a rental sector overhaul with plans published this week to ban landlords from discriminating against tenants on benefits or those with pets, introduce a new minimum standard for private-sector rental properties and allow tenants to reclaim rent for low-quality homes. Section 21 “no-fault” evictions will also be abolished.

Henry Bates*, 58, is a landlord with 65 properties across south-east London. “Since the tax changes, we basically don’t make a profit,” he said.

Rate rises will further eat into margins as Mr Bates’ fixed-rate mortgages expire. He is remortgaging one house at a rate that is a whole percentage point higher. He has also opted to take out some equity from the property.

Altogether, this means the annual mortgage bill on the property has doubled to £22,716.

Landlords in cheaper areas, where yields are higher, will be more protected than in London, but rate rises will still take their toll. If the Bank Rate hits 2pc, net profits for a higher-rate taxpayer in the North East will fall by 37pc. In the North West the drop would be 67pc.

The impact of rate rises will be partly offset by rising rents, as tenant demand continues to be high. But landlords on variable-rate mortgages cannot necessarily respond quickly enough.

Adam Kingswood of Kingswood Residential Investment Management, a buy-to-let specialist in Nottingham, highlighted the case of an overseas investor on a variable-rate mortgage. “Even before this week, he had already seen his yield fall by one percentage point,” he said.

Tenant protections will prevent landlords from raising rents in response to higher interest rates. A landlord on a variable-rate mortgage will be unable to offset the bigger bills until the next rent review, which by law cannot be more frequent than once a year.

“Interest rates don’t have to go up much to affect profitability,” said Ms Beveridge. “If investors can’t pass on rising costs to tenants in the form of higher rents, some are likely to exit the market.”

Rent growth will also be capped by tenant affordability, which is being curtailed by the cost of living crisis, said Mr Kingswood. “Tenants’ income hasn’t risen at the same pace as rents and they are also facing higher prices for food, energy and fuel,” he added.

“We’re already seeing tenants go back to living with their parents and more tenants than ever are trying to negotiate on rent increases. Rental growth has got to slow.”