Are banks taking more of the rent as landlords face a pay cut?

For years, landlords have been able to borrow at around 3% and achieve rental yields of around 6%. The bank lends the money and takes more than half in real terms, while the landlord covers all the real work of managing and running a tenancy.

However, as interest rates rise, we are facing a perfect storm for new borrowing landlords as the banks demand more of the rent, effectively giving landlords a pay cut.

People who chose a career as a landlord a decade or two ago have largely seen capital growth and lower interest rates. It appears politics of envy continues to try to “put this right” by taxing and legislating against landlords more. But the Landlords they are envious of left the station a long time ago. They have grown equity in the property, money in the bank and are making a sizeable return on their original investment. Obviously, this was all a risk at the time, as it is now, and they took the risk.

However, for some of this group of landlords, the ones who managed to pay off the loan, the punitive rises in interest rates are nothing but good news. Those who have made equity or paid their mortgage off can now make 5% returns on National savings bonds. Much better than the 3% they originally earned, which was the 6% return minus the 3% band loans.

However, because the chaotic system punishes borrowing landlords, people now choosing a career as a landlord will likely find it impossible to balance the books. This is because if you borrow at 6% and your rental yield is also 6%, you are starting with nothing and a loss after expenses and costs. Setting up costs are significant with a 5% stamp duty, void period and upgrade make a profit only possible on the distant horizon.

Whilst this type of market favours investors who buy distressed property and add value; even here the costs make it a very challenging environment to be in.

So despite the politics of envy, the discriminatory Renters Rights Act, the increase in stamp duty and disproportionate costs of section 24 in a rising interest rate environment these still were manageable. It is the mortgage interest rates that will prevent potential landlords from taking up the mantle of providing housing as the banks demand more of the tenants’ rent to give to those who have already made it.

I hope this doesn’t come across as a complaint about landlords’ who invested a while ago. It is meant as observation from decades of following the property market. Landlords who have served their tenants over the last couple of decades should be applauded and not vilified and discriminated against. The measures that are being taken now are punitive and discriminatory and can likely only damage the rental market.

What does the Property118 community think?

Thanks,

Paul