Yahoo Finance Buy-to-let landlords facing financial cliff edge after mini-budget
Britain’s amateur landlords have benefited from years of runaway house price inflation, while intense competition among tenants has sent rents soaring. Now, thanks to the meltdown in the mortgage market triggered by last week’s disastrous mini-budget, many face a financial cliff edge.
Figures shared with the Guardian show that the number of new buy-to-let mortgage deals available has plummeted by 55% in less than a week as lenders frantically pulled products and in many cases increased prices.
Data from Moneyfacts also showed that at 4.87%, the average new two-year buy-to-let fixed rate on offer on Thursday was 68% pricier than the equivalent deal in December.
“I think there are more and more risks mounting for landlords,” Aneisha Beveridge, the head of research at the estate agent Hamptons, told the Guardian.
“The landlords who will be most at risk are those that have bought in the last couple of years and taken out the maximum loan they could get against that property.”
That could particularly apply to some who have bought in areas offering the weakest returns such as London, who were “likely to see their profits hit hardest”, she added.
Some commentators have previously put the value of the private rental sector at £1.4tn. For many small investors, their property portfolio is their main pension.
But the financial markets have signalled that the Bank of England may need to raise interest rates to 6%, while some analysts have suggested house prices could fall byup to 20%. Some investment property owners are in effect faced with two options: raise the rent in the hope that a tenant will pay it and keep the landlord in profit territory, or sell up.
The UK economists at Pantheon Macroeconomics said: “Buy-to-let landlords have benefited from rapid capital appreciation and strong growth in new rents over the last year. But the jump in mortgage rates suggests profitability will decline when many landlords refinance their loans.”
Data issued by Hamptons suggests many will face losses if interest rates shoot up. It said this week that the average higher-rate tax-paying landlord who remortgaged last month could expect their annual net profit to plummet from £3,198 to £884 – a 72% decline compared with last year due to rising rates. If the most recent 0.5 percentage-point base rate rise to 2.25% is passed on to mortgage costs, that would slash average profits to £212 a year.
If the base rate were only to nudge up to 2.5%, that same landlord is likely to make a loss and would need to earn a yield of more than 7% to stay out of the red. That was something only achievable on average in less than a quarter of local authorities in England and Wales, Hamptons said. Many are predicting the base rate could go a great deal higher than that.
The firm added that the rise in new mortgage costs meant a typical landlord who bought a £222,000 buy-to-let last year “will likely see their annual interest-only mortgage payments nearly double from £3,010 to £5,903 if they remortgaged last month”.
Moneyfacts told the Guardian the number of buy-to-let mortgage deals available was 1,942 on the day of the mini-budget but just 862 on Thursday.
The original explosion in buy-to-let was triggered by legal changes relating to tenancies in the 1990s, plus a tax regime that favoured landlords. The sector enjoyed runaway growth but in 2015 the then-chancellor George Osborne slashed tax relief for property investors, and also ditched a key landlord tax break.
These changes hit profits and prompted some landlords to quit the market, while others responded by increasing rents. The measures looked like they could deal a serious blow to the sector but the years of strong house price growth and growing demand for rental properties that followed gave buy-to-let a whole new lease of life. The party may now be over.
Vikash Gupta, the co-founder of the asset management firm VAR Capital, believes the time has come to head for the exit.
“We are advising our clients to sell out of buy-to-let properties, especially those in prime central London and held in personal names, as such investments will remain stressed and potentially unprofitable in the near future,” he said.
