Buy-to-let investors are ready to quit the market. Rising interest rates, soaring bills and tighter regulations mean it is harder than ever to be a profitable landlord.
There are predictions of an exodus. In the first five months of this year, landlords were the vendors for 16.4 per cent of property sales, according to the estate agent Hamptons, up from 10 per cent in 2013. There are 260,000 fewer privately let properties in the UK than there were in 2017.
Some may be taking advantage of house price rises, others are quitting the rental market because it has become unprofitable.
During the pandemic landlords worried that their tenants’ incomes would dry up and leave them in arrears while they could not get them to leave because of the eviction ban introduced in November 2020, which lasted until May last year.
Landlords have been criticised for taking government payouts to help with energy bills, which the government said should be passed on to tenants. The latest issue they must get to grips with is energy efficiency and many face big bills to bring their properties up to standard. So who would be a landlord in 2022?
House prices
The first official buy-to-let mortgages arrived in September 1996, allowing buyers to borrow for a property that they did not intend to live in. Before that landlords either had to buy property outright or take out a commercial mortgage, which often had high interest rates and terms that rarely exceeded 10 years. Buy-to-let mortgages require a 25 per cent deposit, and you can expect to pay roughly one percentage point more than on a residential mortgage, as well as an arrangement fee that can be as high as 3.5 per cent of a property’s value.
There were two million buy-to-let mortgages at the end of last year, up from 1.8 million in 2015, according to the banking trade body UK Finance.
The latest English Housing Survey suggests that there are 4.4 million privately rented homes, making up 19 per cent of households in England.
There are an estimated 1.7 million landlords in the UK and 57 per cent of those covered by the latest English Landlords Survey owned more than one rental property, with 18 per cent owning five or more.
However, it’s getting harder to take on a buy-to-let. The average UK house price in July was about £292,000, up from about £58,800 in July 1996. A minimum 25 per cent deposit would be £73,000 on average.
Fewer landlords have been buying properties. In March 2021 nearly 47 per cent of approvals for buy-to-let mortgages were for new purchases rather than remortgages. In March this year it was 36 per cent, said UK Finance.
Taxes
There are other costs to consider too. A levy introduced in 2016 means that anyone buying a second home must pay an additional three percentage points in stamp duty. It adds £15,000 to a £500,000 property, putting the total stamp duty bill at £30,000.
Before April 2017 landlords paid income tax on their profits after deducting the cost of their mortgage interest. Under that system, if your monthly rental income was £1,000 and mortgage interest was £500, then your annual taxable income would be £6,000. This would mean a £1,200 tax bill for a basic-rate taxpayer and £2,400 for a higher-rate payer.
This changed in April 2020 so that landlords are taxed on the full rental income, but given a tax credit equal to 20 per cent of the mortgage interest. The same landlord would still pay £1,200 tax if they were a basic-rate payer, but a higher-rate payer would pay £3,600.
Landlords can, however, deduct “allowable expenses” before their taxable income is calculated, including the cost of maintenance, and bills such as energy, council tax and water, if they are included in the rent.
Professional landlords could reduce their tax bill further if they own their properties through a limited company and so pay corporation tax at 19 per cent on profits, instead of income tax.
Falling yields
Buy-to-let profitability is based on the yield you can achieve — the percentage of a property’s value you get back in rent in a year. Rising house prices mean you need a higher rental income to make the sums work.
In 1996 the average house price was nearly £59,000 and you would need to earn about £2,950 a year — £245 a month — to earn a yield of 5 per cent, discounting running costs, tax and mortgage payments.
With the average house price now about £292,000, landlords would need £14,600 a year — £1,217 a month — to achieve the same return.
Lower-yielding properties are being ditched as a result. Hamptons found that 71 per cent of properties sold by landlords since the start of last year had a yield of 5 per cent or less.
Rents are rising, but landlords must strike a balance: tenants are grappling with a cost of living crisis and wages are falling in real terms. The Centre for Economics and Business Research predicts that one in ten rented households in England could be in rental arrears by next April.
In June the average rent outside of London was a record £1,126 a month, according to Rightmove, a property website, up 11.8 per cent on last year. In London it was up 15.8 per cent to £2,257.