You are here: Home - Mortgages - Buy To Let - News -

Landlord mortgage costs ‘to exceed rental income over the next few years’

Written by: Shekina Tuahene
Low yields and falling house prices could lead to years of poor returns for landlords, with some expected to make cash losses.

In its housing market update, Capital Economics said the rise in mortgage rates could see a small number of landlords paying more in mortgage repayments than they earn on rent, prompting landlords to leave the sector. 

Andrew Wishart, senior property economist at Capital Economics, said a drop in house prices meant returns would be “very weak” in 2023 and 2024. 

Capital Economics calculates gross rental yields by dividing average rents based on its own data by average house prices based on data from Nationwide. It found that in Q3 this reached 4.3% and predicts that over the next two years, this will rise to 5.4%. 

It said first-time buyers delaying property purchases and nominal increases in pay would support rental growth and offset the impact of declining house prices. 

However, Capital Economics forecasts a 12% fall in house prices over the next 18 months, which will still weaken landlord returns. It predicts total returns will fall to negative 5% in 2023, then rise to +1.5% the following year. 

Wishart said: “Following a decade in which total returns averaged almost 9% per annum, at first glance a couple of weaker years may not appear too problematic.” 

Yet, because most buy-to-let investments are funded through borrowing, Capital Economics said once the cost of servicing a mortgage had been accounted for, landlords would see paper losses and the cost of their mortgage exceed rental income. 

‘More vulnerable to rate changes’

Further, Capital Economics said 80% of buy-to-let mortgages are interest-only, which makes them more vulnerable to rate changes. 

It said the average buy-to-let mortgage rate would reach 5.9% next year, up from 2% in early 2022. This will lead to a “stark increase” in debt servicing costs, Wishart said.

Wishart added: “A landlord with a 60% loan to value (LTV) interest-only mortgage against the average rental property would see their annual mortgage payments jump from £4,600 to £12,400 and absorb all their net rental income, albeit relatively briefly.” 

Additionally, nearly a third of landlords have an LTV ratio of over 60% on their portfolio meaning a small number will make a cash loss. Landlords facing a cash loss and coming to the end of their fixed rate period will be unable to pass mortgage stress tests, and so will have to move onto standard variable rates. 

Capital Economics said these changes to returns came at a time when landlords were already being squeezed through policy such as restrictions on tax relief and a 40% tax on rental income for higher rate taxpayers.

Just recently, it was announced in the Autumn Statement that the annual exempt amount for Capital Gains Tax is set to more than halve from £12,300 to £6,000 in April next year, then fall again to £3,000 in April 2024. 

No mass landlord exit yet 

Wishart said: “Putting that altogether, it seems likely that some landlords may choose or be forced to exit the market altogether. That doesn’t appear to be the case yet, with the landlord instructions balance in line with its five-year average in October and UK Finance suggesting that the number of outstanding buy-to-let mortgages rose slightly in Q3, to just over two million.  

“Admittedly, with the interest rate on three quarters of buy-to-let mortgages fixed for two to five years, the squeeze on landlord finances will be gradual.” 

He added: “But with house prices falling, the capital gains tax exemption being reduced, and landlords with high LTV ratios set to have difficulty remortgaging, we suspect that some buy-to-let landlords may attempt to sell in short order.” 

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Your right to a refund if travel is affected by train strikes

There have been a wave of train strikes in the past six months, and for anyone travelling today Friday 3 Febru...

Could you save money with a social broadband tariff?

Two-thirds of low-income households are unaware they could be saving on broadband, according to Uswitch.

How to help others and donate to food banks this winter

This winter is expected to be the most challenging yet for the food bank network as soaring costs push more pe...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week