Landlords’ profits to fall to £7 a year as mortgage rates cripple investors

Buy-to-let portfolios are on course for a 99.7pc drop in profits. By Melissa Lawford

Soaring buy-to-let mortgage rates will cause landlords’ profits to slump to just £7 a year per property when they remortgage this year. Landlords will have to impose enormous increases in rent, inject tens of thousands of pounds in cash into their properties or sell up as huge jumps in interest rates destroy the viability of buy-to-let portfolios, experts have warned.

A landlord who purchased a typical £183,000 buy-to-let in 2020 with a 1.89pc mortgage would have paid £2,261 each year on their mortgage, according to analysis by Hamptons estate agents. For the average higherrate taxpayer, their post-tax profit would have been £2,526.

If this landlord remortgaged today at an interest rate of 5.14pc, the annual mortgage payments would triple to £7,127. As a result, the net annual profit would fall to just £7. This would be a 99.7pc drop in post-tax earnings – even accounting for rent growth of 24pc, the average, over the same period.

In the more expensive parts of the country, where higher house prices result in much bigger mortgage bills for landlords, the impact of interest rate rises will be far more extreme. In five of the 11 regions of Britain, properties will become loss making.

In London, a landlord who bought a typical £462,970 property in 2020 would have made a net profit of £3,374 a year. If they remortgage now they will start to lose £3,687 a year on the property. Landlords in the South East, South West and East will see respective annual losses of £673, £203 and £657.

BUY-TO-LET IS ‘UNSUSTAINABLE’ Craig Fish of Lodestone mortgage brokers said: “The message from all of the landlords we deal with is that these rates are unsustainable.”

Investors with a small number of properties are selling up, Mr Fish said. “They feel it is no longer cost-effective or financially viable.”

One landlord Mr Fish advised had a fixed-rate deal ending in January. Their existing mortgage rate is 2.79pc, which costs them £627 a month. “The best rate that their current lender is offering is 5.1pc, which means monthly payments of £1,147,” Mr Fish said.

This means that their monthly bill will surge by 83pc. The rental on the property is £1,600. “After deducting agents’ fees and other costs, they are going to be left with very little profit,” he said.

PROPERTIES WILL BECOME UNMORTGAGEABLE

Max Armstrong of North East Property Investment, a regional buy-to-let specialist, said landlords’ costs were rising so much that they were unable to remortgage without asking for big rent increases.

While the maximum loan size for residential properties is calculated as a multiple of the borrower’s income, the benchmark for buy-to-let mortgages is the ratio of the rental income to a landlord’s interest payments. This is known as the interest coverage ratio (ICR). As rates rise, landlords will fail to meet their lender’s minimum ICR requirements unless they increase rents.

Mr Armstrong gave the example of one landlord with a £150,000 property who will come to the end of his twoyear fixed-rate deal in January. Previously, the landlord needed to charge rent at £600 a month to meet the ICR required by his lender.

“Now the rent needs to be just under £900 for him to be able to refinance. He has to put the rent up because his only other option is to sell,” Mr Armstrong said.

The current rent on the property is £750, so the tenants would see their costs jump by a fifth.

RENTS WILL HIT A CEILING Enormous tenant demand – further fuelled by high interest rates, which make many first-time buyers unable to buy – and a shortage of supply have enabled landlords to impose large increases in rent.

“We have been putting up rents by 10pc to 15pc on existing lets. On properties that we are taking back to the market, the rents have gone up by 20pc to 40pc compared with what they were previously let for,” Mr Armstrong said.

But there is a looming crunch point at which tenants will simply be unable to afford rents. “That is what we will be keeping an eye on in 2023. We can see a tenant’s references and in theory see that they can afford something, but the reality can be different if their utility bills keep going up, if their food bills keep going up. And then we have Christmas,” he added.

INVESTORS MUST PAY £43,000 TO KEEP REPAYMENTS FLAT If landlords cannot raise rents, their other option is to inject cash into their properties to reduce their loan sizes.

If a landlord who bought a typical £183,000 property in 2020 remortgaged today at a rate of 5.14pc, they would need to inject an extra £86,807 in cash to keep their monthly payments the same, according to Hamptons.

This cash gap will be partially offset by house price growth of 23pc over the past two years, which means the value of the property will have climbed to £226,050. But the landlord will still have a shortfall of £43,797.

In London, where house prices are much higher and growth over the past two years has lagged the national average at 13pc, a landlord would need to add £160,370 in cash to their equity in order to keep their monthly payments the same.

BLOW TO NEW INVESTORS Many are opting simply to sell up instead. Samuel Mather-Holgate of advisers Mather & Murray Financial said: “Several of my landlord clients have put their assets on the market over the past three months as the viability of this sector starts to fail.”

But soaring rates are a blow to new investors too. One client, said broker Hannah Bashford of Model Financial Solutions, received a mortgage offer in February. A solicitor’s error meant the transaction dragged – and now the mortgage has new terms. “We are battling to get it through with the provider as the property now doesn’t fit the ICR calculation,” Ms Bashford said. “The landlord would have to pay £18,000 to bring the loan down.”

‘After deducting agents’ fees and other costs, they are going to be left with very little profit’

HIGH MORTGAGE RATES

ARE HERE TO STAY Although mortgage rates have declined slightly since Jeremy Hunt replaced Kwasi Kwarteng as Chancellor and scrapped the majority of the miniBudget, buy-to-let rates are still far higher than in September.

The average rate for a two-year fixed-rate buy-to-let deal on Nov 10 was 6.63pc, according to Moneyfacts, a data company. This was nearly two percentage points higher than the average 4.93pc rate before the mini-Budget on Sept 22.

Hamptons’ calculations assumed the landlord took out a two-year fixed-rate interest-only mortgage and bought initially with a 25pc deposit.