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Higher mortgage costs threaten surge of UK buy-to-let property sales

The long-term rise in refinancing costs threatens to trigger a surge in sales of buy-to-let properties as the financial and regulatory burden mounts on UK landlords, putting further downward pressure on house prices.

Higher mortgage costs have hit leveraged property investors hard this year and many landlords, especially the smaller ones, are struggling with their business models, estate agents and analysts have warned. Other factors putting pressure on landlords’ business models include tax changes, upcoming tenancy reform in England and the prospect of new rules limiting the frequency of rent reviews.

Despite better than expected inflation data last week, which was followed by modest rate cuts from some lenders, mortgage interest rates are expected to remain high, leaving the worst affected landlords looking at getting out.

In a report last week, the consultancy Capital Economics calculated that, with rates on fixed buy-to-let mortgage more than doubling since 2021, refinancing now could push costs — including interest, tax and operational expenses — above rental income on more than a fifth of UK properties.

The consultancy estimated that 11 per cent of rental homes would become unprofitable on a mortgage rate of 5 per cent, rising to 21 per cent on a 6 per cent rate, assuming in both cases a 4.6 per cent rental yield, a measure of investment return comparing annual rent on a property with its value.

It warned that attempts by landlords to offload unprofitable housing would have a knock on effect on the wider property market.

“Overall, we think that the financial stress faced by landlords will lead to a rise in buy-to-let arrears and forced sales, undermining the tight supply conditions which have helped support house prices of late,” the report said.

“Even if some landlords cover the losses out of their own pocket or sales are spread over several years, disposals of rental properties will make a big difference to the balance of supply and demand in the housing market,” it added. 

The analysis echoed a warning from the Bank of England earlier this month that landlords selling in sufficiently large volumes “could put downward pressure” on UK house prices.

House prices fell last month at the fastest annual rate since 2011, 2.6 per cent down on June last year, according to the Halifax index.

The influence of the private rented sector on the overall market has grown substantially in the past decade, accounting for 4.4mn households in England in 2021 or 19 per cent of the total, compared with 3.1mn in 2009, according to the most recent English Private Landlords survey.

Buy-to-let mortgage interest rates began to climb steadily from December 2021, when the BoE began a succession of base rate rises. But the pace of mortgage rate increases picked up rapidly in May, after disappointing inflation figures.

While there were signs this week of some lenders easing back on rates, brokers expect costs will remain substantially elevated compared with the era of ultra-low rates.

Landlords refinancing mortgages face average buy-to-let rates on a two-year fix of 6.97 per cent — up from 2.98 per cent in July 2021, according to data provider Moneyfacts. Five-year rates fell 0.1 percentage points overnight on Wednesday to 6.81 per cent, compared with 3.28 per cent two years ago.

Almost 60 per cent of landlords in England have a buy-to-let mortgage, according to the English Private Landlords survey, while separate data from UK Finance showed there were just over 2mn buy-to-let mortgages in the UK in March. 

Howard Davis, founder of Bristol-based agency Howard Independent Estate Agent, said he had seen a shift in recent weeks, with a sell-off by private landlords pushing down average house prices in his area.

“So many of our landlords are saying, ‘Look, I’ve had enough of this. Can you sell off a property for us?’ And they’ll take what they can get for it.” 

Richard Donnell, research director at property site Zoopla, said many of those selling across the UK were landlords with smaller portfolios. “These are the landlords who may have got into it more by accident or for the house price inflation — the people who don’t see it as a business and now don’t want the headache of managing it.”

Emma Cox, managing director of real estate at lender Shawbrook, said larger, professional landlords were less vulnerable and were looking to “offload some of those properties that potentially won’t continue to withstand the pressures on rents and mortgage payments”.

Analysts at consultancy Pantheon Economics said in a note last week they expected high mortgage costs and the wider cost of living crisis would begin to weigh more heavily on the rental sector in the coming months. “Lenders expect demand for buy-to-let mortgages to drop rapidly in the third quarter.”

Other regulatory issues are also deterring investment, although landlords in England and Wales look set to avoid at least one looming extra cost after the government signalled it would delay the introduction of tighter energy efficiency rules beyond the proposed 2025 deadline.

The strict limits on mortgage interest tax relief since 2020 are eating into profits as mortgage rates have jumped. These affect landlords who pay the higher rate of tax and own properties in their own name, rather than through a limited company.

According to estate agent Hamptons, such a landlord letting out a £200,000 property on a gross rental yield of 6 per cent after remortgaging their £150,000 loan at a fixed rate of 6.49 per cent, would make a loss of £2,898. This contrasts with a post-tax profit of £2,500 in 2021 at a fixed rate of 2.03 per cent.

Official data published last week shows landlords have responded by pushing through rent increases. Rents rose 5.1 per cent in June, according to the Office for National Statistics, the fastest annual pace since records began in 2016.

But another ONS survey from earlier this month suggested landlords might struggle to push through further increases to cover their higher costs with 43 per cent of tenants reporting difficulty affording rental payments. Some 14 per cent of renters said they could not afford to buy food in the two weeks preceding the survey.

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