Rising interest rates hammer BTL returns by 45%

Rising interest rates hammer BTL returns by 45%

9:42 AM, 11th July 2024, About A week ago 13

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New research reveals a huge decline in profits for buy to let landlords in the UK, raising concerns about a worsening rental crisis.

According to a study by Finder, a personal finance website, annual returns for landlords taking out new BTL mortgages have dropped by a staggering 45% compared to April 2020.

This dramatic fall is, the platform says, down to soaring mortgage rates, which currently stand at 4.73% for the average two-year buy to let product (at 75% LTV).

The findings underline growing concerns about a shrinking pool of rental properties as landlords increasingly leave the private rented sector (PRS).

‘Buy to let market has been stagnating’

Liz Edwards, a money expert at the firm, said: “The buy to let market has been stagnating over the past couple of years as rising interest rates have made it less profitable for landlords.

“We are now seeing the worrying effects this is having on an already competitive rental market, leaving renters with fewer options and pushing prices higher and higher.”

She added: “Record high UK rent inflation of 9.2% was seen in March this year and, while this is slowly beginning to ease, it remains worryingly high.

“This new government needs to tackle the rental crisis head-on as rents continue to climb and the number of available rental properties remains well below what is needed to meet demand.”

Estimate a landlord’s potential returns

The research by Finder compared historical buy to let mortgage rates, house prices and rental income to estimate a landlord’s potential returns.

The analysis revealed that a landlord who secured a two-year fixed-rate BTL mortgage in April 2020 for the average property – worth £230,318 – could expect a monthly return of £776 after covering mortgage interest.

This equates to a total annual return of £9,309, assuming full occupancy.

A landlord entering the market

However, for a landlord entering the market in April this year with a mortgage on the average property – now valued at £281,373 – the picture looks much bleaker.

Monthly returns have shrunk by 45%, averaging just £424, resulting in a total annual return of £5,087.

This represents a significant decline of £4,221 in potential rental income per property each year.

Plummeting value of buy to let lending

Finder says the impact of these trends is evident in the plummeting value of buy to let lending with a 56% drop in total lending value from 2022 (£41.36 billion) to 2023 (£18.26 billion).

This decline began in late 2022 with a 40% decrease in lending value between the last quarter of that year and the first quarter of 2023.

While lending activity has stabilised, the first quarter of 2024 still saw a 25% reduction compared to the same period in 2023.


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Cider Drinker

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8:36 AM, 11th July 2024, About A week ago

I’d be surprised if there was any profit in it for anyone buying at £280k with a mortgage at 4.73% (what about the fees? Shouldn’t we use the Apr?), especially once tax (S24) and other expenses are taken into account.

As for record rent inflation of 9.2%. If this is the case, why did LHA rise by less than 11%, the first rise in 4 years, in my area?

Rent increases tends to lag behind inflation as landlords react to the changing financial landscape. Record rises of 9.2% is still lower than recent inflationary highs.

Jo Westlake

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9:51 AM, 11th July 2024, About A week ago

Only 5 of my mortgages have so far increased. The other 5 are on decent fixes until 2025 and 2027. Even so my mortgage interest increased by over £30K last year. Plus the extra £6000 Section 24 tax. I have 16 properties. To cover that increase every property would need a rent increase of nearly £200 a month. That simply isn't realistic in one hit. Several of them have UC tenants so LHA only increased by between £58 on a one bed and £196 on a 4 bed. HMO rent increases have been around £25 per person per month (roughly half of the increased cost per house).
It's going to take years to increase rents enough to cover the extra costs, especially as the cost of everything else has also increased - insurance, tradespeople, materials, etc.

The only way rent increases can be contained is if Section 24 is abolished and we are returned to the same method of taxation as EVERY other business.

student landlord

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9:54 AM, 11th July 2024, About A week ago

4.75% for a two year fixed? I’d love to know where this comes from, I can’t find anything that doesn’t start with a 5 or 6!

I only have one option left in order for my business to survive-sell off my properties that have the highest mortgage rates and pay off some of the others. With the additional burden of section 24, the only way to make it work is to reduce my portfolio and have some properties unencumbered. Hopefully they will sell to other HMO landlords so that it doesn’t further reduce the amount of rental stock to tenants. They would still produce an excellent gross yield over 10% for anybody that is able to buy without a mortgage or in a limited company to mitigate against the tax onslaught.

Ryan Stevens

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10:23 AM, 11th July 2024, About A week ago

No sh*t Sherlock.

They need a study to work out that higher interest rates mean lower returns for landlords!!!🤣😂🤣

Ana Martinez Fernandez

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10:33 AM, 11th July 2024, About A week ago

It's not only the much higher interest rates, it's also the subsequent increase in taxes that we pay to HMRC for those higher interest that we pay the bank.

Neil P

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10:40 AM, 11th July 2024, About A week ago

To temper the headline drastic fall in profits, we need to remember that from 2008 to 2022 rates have been ridiculously low. Anyone taking out a loan in that time knew they'd increase - and so should have factored that into their calculations. Having said that, I expected base to level at around 3-4%, not 5.25%.

S24 in the real criminal in all this - cleverly slipped in by Osborne when rates were low and the impact less dramatic. Still can't get my head round why we're the only business not allowed to offset all their finance costs, crazy.

Northern Observer

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10:46 AM, 11th July 2024, About A week ago

Only the Reform party advocated revoking Section 24. I asked my local labour MP and was met with silence, no doubt due to a lack of knowledge / understanding, or perhaps he simply couldn’t care less about greedy landlords…

moneymanager

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10:51 AM, 11th July 2024, About A week ago

The Fire Safety Act has added an ongoing £600 p.a to every service charge, that's just annual compliance over and above all existing statutory auditing.

NewYorkie

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11:17 AM, 11th July 2024, About A week ago

Reply to the comment left by Neil P at 11/07/2024 - 10:40I never took any cash out of 2 BTLs, knowing rates would rise eventually. I had invested for capital appreciation, but the value of one had dropped due to leasehold, etc... and hence remortgage wasn't possible without a significant cash injection. At least I was making some profit. One of the mortgages I had with ME was then sold to a business called Siberite, who know I can't remortgage and racheted up their rate over the past 3 years. I then had a lengthy eviction which used up 10 years of retained profits. I sold that flat and used the small equity to pay down some of the Siberite loan, but I still don't make any profit.

Hopefully, rates will start coming down, and the leasehold and building safety issues are close to resolution, which should increase the valuationnif my remaining property.

BTL has been good to me for 24 years, but it no longer stacks up as a viable investment. I can and will put my money elsewhere, but those who suffer are renters.

Robert Sled

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11:46 AM, 11th July 2024, About A week ago

Reply to the comment left by NewYorkie at 11/07/2024 - 11:17
That's shocking. It sounds like that's an expensive property? What are the numbers? 🔢 Is it in the South East?

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