Is Your Buy-Lease Property Driving You Crazy? Find Out What Owners Are Saying!

Rising interest rates and regulatory changes are exacerbating the risks for mortgaged buy-to-let businesses already strained by the loss of tax relief, according to new research tracking the growth of the UK sector over 30 years.

As landlord-tenant relations have become strained in many parts of the country due to the cost-of-living crisis and steep rent increases, the government has announced new laws aimed at modernizing rents and settling disputes.

However, the changes are looming at a time when the financial viability of many buy-to-let mortgage investors is threatened by steep interest rate hikes.

What does the research say?
The number of landlords in the private rental industry has soared from 1.7 million in 1989 – when the advent of the insured home rent in its modern form gave landlords greater flexibility over rents and lease terms – to 4.6 million today, according to research by real estate agent Savills.

While legislative changes laid the groundwork for growth, the industry didn’t take off until the 2000s, when specialized buy-to-let mortgages became widely available and owner’s business became a mainstream investment option for many middle-class Britons.

This growth was held back, briefly by the 2008-2009 financial crisis, and more recently by restrictions on tax relief on mortgage interest payments, which were phased out over the four years to 2020.

By removing the option for individual rental property owners to offset mortgage interest costs with taxes at their own rate, the measures have dented their bottom line and its effects have intensified as rates have risen over the past year .

Lucian Cook, director of residential research at Savills, said: “Over a long period when interest rates have been low, the potential impact of such a tightening of tax breaks has been hidden because it did not necessarily have a material impact on the finances of the residents. owners. But it really showed its hand as we started to see rate hikes.

Savills gave the example of a buy-to-let investor on a mortgage of 70% of the loan value paying income tax at the highest rate. Last year, he said a landlord with a £236,000 property would make an average profit of 23% of rental income, even after tax. It has now dropped to 3.9%.

What happened to landlord interest rates?
Rates on buy-to-let mortgages have nearly doubled since March 2022, according to financial site Moneyfacts, with significant increases in the past two weeks. Both the two-year and five-year corrections are currently charged at an average of 6.03%, up from 3.05% and 3.29% respectively in March of last year.

This week, lenders that raised their buy-to-let rates included TSB – by increases of up to 0.75 percentage point – and The Mortgage Works, a subsidiary of Nationwide, as well as a number of building societies.

How are the owners reacting?
In its monthly survey of the views of estate and letting agents, the Royal Institution of Chartered Surveyors on Thursday said that rising interest rates, as well as changes in the pipeline with the tenant reform bill, were prompting owners to list more properties for sale.

Tarrant Parsons, senior economist at Rics, said: “Interest rate hikes are also impacting the rental sector and, combined with the looming reforms proposed in the government’s renter reform bill, landlords are deciding increasingly leaving the sector and selling properties, causing further constraints on supply leases.”

Comments from agents on the state of the market suggested owners were nervous about the measures. Richard Franklin of Worcestershire-based estate agent Franklin Gallimore said the legislation was “causing supply to dry up and rents to rise. More formal notices [are] being served than in recent history, which does not bode well”.

Cook of Savills, however, said fears of a throwback to the 1970s, when rents were regulated and tenants could only be evicted if they breached the tenancy terms, were exaggerated. While the new legislation means fixed-term leases will be replaced by periodic leases, which have no expiration date, landlords have the right to terminate a lease if they wish to sell the property, neutralizing the risk of a discount on value.

So how will the industry change in the long run?
The homeowners market will increasingly favor cash buyers or those with large stakes in their properties or who hold lower levels of debt, Savills said. But the majority of single homeowners mortgaged last year were still looking for substantial loans, with the average loan-to-value ratio on new buy-to-let mortgages at 72% in 2022, according to UK Finance.

Higher rates also reinforce the trend of holding real estate within a limited company structure, where profits are unaffected by the loss of income tax relief. Users of these facilities are typically homeowners with portfolios of four or more homes, who often run the business as a full-time occupation.

But Cook warned that losing the Section 21 clause, which currently allows landlords to terminate a lease without specific reason, risked problems for low-income families looking for rental accommodation.

“The risk ultimately is that landlords simply go with wealthier tenants who they feel offer more long-term security in terms of rent payments. When we see less rental stock available, it could mean that those hardships fall on those in lower socio-economic groups.”