Investing in property has been one of the best ways to earn passive income for centuries. Whether it’s to replace a pension, act as a side hustle or prop up earnings, it has always been possible to balance the books in favour of profit. Up until now.
While many landlords thought Section 24 and the scrapping of mortgage interest tax relief would be the catalyst for an income deficit, a booming lettings marketing and rising rents have offset losses.
What many landlords failed to acknowledge was a finance bubble that is about to burst. The Sunday Telegraph ran an article in December 2022 with the shocking heading ‘landlords' profits to fall to £7 a year as mortgage rates cripple investors’. There, laid bare, is the issue.
The era of cheap lending is over. Granted, volatility surrounding inflation, the base rate and swap rates is easing but fiscal experts agree that we have seen the end of mortgage rates in the region of 2% – a figure that was even less for those with the best loan-to-values.
Thousands of mortgaged landlords are now exposed, with fixed-rate products expiring at a rate of knots. The newspaper used figures supplied by agent Hamptons to illustrate the severity of the issue.
For example, a landlord who bought a typical buy-to-let property for £183,000 in 2020 with a 1.89% mortgage rate would have paid back £2,262 annually. A landlord buying the same property today will likely encounter a mortgage rate in the region of 5.14%, which would result in a yearly repayment of £7,127 – more than triple the repayment seen three years ago.
As a result, profit margins are being slashed and the amount rents would need to increase by to plug the black hole is simply unachievable – especially in a cost of living crisis. The article went on to highlight how landlords who bought with smaller deposits at higher purchase prices would be the most at risk of poor profits, with many struggling to break even. In fact, attention was drawn to the fact that in 5 of Britain’s 11 regions, buy-to-lets would become loss making.
As well as diminishing profits, landlords should also be concerned about their interest coverage ratio (ICR) – a calculation lenders use when granting new loans. If buy-to-let mortgage rates remain high, more landlords will fail to meet their lender’s minimum ICR requirement. Their only option will be to sharply increase the rent in order to refinance, mindful that there is a limit to how much rents can go up before tenants give notice or default on repayments.
The only other option when it comes to meeting ICR requirements is for the landlord to inject a cash lump sum into their buy-to-let to reduce the loan-to-value and therefore keep monthly repayments reasonable. Using the previously cited mortgage rates of 1.89% in 2020 versus 5.14% in 2022, an investor would need to find almost £88,000 to keep their mortgage repayment the same. When attention turns to London, a landlord may need pump £160,000 into their property to maintain low monthly repayments.
Refinancing has an additional sting in its tail too. Stress tests (testing the borrower’s ability to repay the mortgage should the interest rate rise) are always more stringent for landlords, when compared to owner-occupiers but the mini Budget in September 2022 prompted lenders to tighten this check even further. As an example, The Mortgage Works raised its minimum stress rate to 8.49% on all new buy-to-let applications – a calculation that many landlords would fail.
The LandlordBuyer team is available to work through a number of scenarios with you, establishing whether your buy-to-let or property portfolio will still make a profit in 2023. We’re also on hand to help if your current fixed-rate mortgage is about to expire and your investment doesn’t meet your lender’s ICR calculation.
Part of the solution may be to sell up and cash in before your fixed rate ends – something we can achieve here at LandlordBuyer as we can buy your property and exchange within seven working days. An express sale may be the best solution for landlords whose profits aren’t worth the effort. Why not see how much we would buy your property for by generating a free, no obligation cash offer? Simply fill out this form to get your figure.
If you’d like to chat with us, please get in touch.