[ad_1]
Buy-to-let landlords relying heavily on mortgage finance will struggle to make a profit in 92 local authorities in England and Wales — more than a quarter of councils — according to research that underlines the growing pressures on rental property investors.
Steep rises in mortgage interest rates have hit returns in many parts of the country, in spite of a period of strong growth in rents, the report by estate agent Hamptons International found.
An investor borrowing to buy a rental home with a deposit of 25 per cent — generally the minimum for buy-to-let — on a two-year fixed-rate deal in February faced a mortgage rate of 4.84 per cent, compared with 1.53 per cent at the beginning of 2020.
In expensive areas of the country, buyers need to put down a larger deposit to satisfy lenders that the loan could still be repaid under “stressed” conditions 1-2 percentage points higher than the offered rate. Of the 92 authorities identified by Hamptons as likely to be unviable, 24 were in London, with only five in the north.
An investor looking to refinance a two-year interest-only fix on a rented home valued at £200,000 will see their average rate jump from 2.2 per cent to close to 5 per cent — meaning their annual interest payments would leap from £2,666 to £6,060.
Under Hamptons’ estimate of an average 6 per cent gross rental yield in England and Wales — producing £12,000 a year in rental income — such a landlord paying basic rate tax would see their profits after tax plummet from £4,490 to £1,780. A higher-rate payer — following buy-to-let rule changes introduced in 2016 — would be left with just £120 after mortgage interest, maintenance costs and tax.
“Higher mortgage rates have fundamentally changed the sums for investors,” the report said.
Interest rate rises have favoured older investors with deeper pockets and more housing equity underpinned by long-term price growth. The average buy-to-let investor is aged 59, with only 15 per cent below the age of 45, according to official statistics. Using data from Skipton Building Society, Hamptons found the average landlord who remortgaged in 2022 had a deposit of 45 per cent, cushioning them against cost rises.
However, those entering the market in the past five years, who were less likely to have the means to put down a big deposit, face greater financial pressure. Hamptons estimated 8 per cent of landlords — with 450,000 rented homes — are at greatest risk. Many are in areas of lower rental yields — often in southern England — and face paying down debt, raising rent or selling up when their fix ends.
Rents have been rising sharply. Annual rent inflation for new lets — which rise much faster than tenancy renewals — is running at 11.1 per cent — slowing from 12.3 per cent in mid-2022, according to research this week from property site Zoopla.
Yet few believe there is much scope for further rent rises for landlords who risk finding themselves in lossmaking territory. The ratio of average rents to earnings was at or near its 10-year high in all areas apart from London, Zoopla said. As a result, affordability constraints would bring annual growth rates back to 4-5 per cent by the end of 2023.
Richard Donnell, executive director at Zoopla, said: “We expect rental growth to slow over 2023 as affordability pressures bite, and the slowdown could be dramatic in some city centres.”
Even the current growth in rents falls short of what many landlords require. To make up for the leap in average two-year mortgage rates to nearly 5 per cent over the past year, rents would had to have risen by 28 per cent in England and Wales over the same period, Hamptons said.
Mortgage rates for both residential and buy-to-let borrowers have eased from their highs of October 2022, albeit remaining at high levels. Aaron Strutt, technical director at mortgage broker Trinity Financial, said greater competition between lenders for business had led to rate cuts, with many offering two-year buy to let fixes at 4.75 per cent. “Banks and building societies know they need to work harder to attract landlords,” he said.
But he cautioned that while headline rates were becoming more attractive, borrowers should also consider arrangement fees, which typically range between £999 and £1,999. More recently, lenders were increasingly switching to percentage based fees of 2 or 3 per cent — one specialist lender charged a fee as high as 7 per cent, Strutt said.
Though five-year fixes offered lower interest rates than two-year deals, he had seen more borrowers opting for the shorter fix. “They are hoping rates will come back down again,” he said.
[ad_2]
Source link
