Blog by Mark Harris Chief Executive of SPF Private Clients.

Buy-to-let has long been a popular investment for those looking for an alternative to savings, investments or pensions, with many investors relying on property to supplement their income in retirement, alongside a traditional pension. While it has been a difficult few years for landlords with a raft of tax and regulatory changes, there is no reason why buy-to-let shouldn’t be part of long-term investment planning if investors do their research carefully and take professional advice.

Mounting costs are persuading some novice or accidental landlords to sell up as their properties are no longer profitable and this is also deterring new investors from becoming landlords. But despite the challenges, experienced, professional landlords seem committed to buy-to-let and are finding opportunities to add to portfolios. As higher mortgage rates, along with the cost of EPC upgrades, cause further headaches, we look at the reasons why many are still choosing to invest in buy-to-let.

Rising rents

While costs seem to be mounting, rents also continue to rise. Recent research from property website Rightmove reveals that 42 per cent of renters in 10 major UK cities were contacting letting agents to move out of city accommodation to cheaper locations, up from 28 per cent in February 2020, as Rightmove said rising rents, along with increased living costs and lack of available homes to move into were forcing their hand.

Indeed, as some of the smaller/accidental landlords with properties in their own name come out of the market, the availability of rental property continues to shrink, further pushing up rents. The average rent in city centres was up 12 per cent on last year, with demand more than doubling (up 125 per cent) since February 2020.

As higher mortgage rates mean many first-time buyers are forced to rent for longer, that demand for rental properties shows no sign of diminishing, pushing rents up further.

Slowdown in price growth

Landlords who are purchasing property typically look for two separate requirements to form a balanced portfolio – capital appreciation and income.

Several house-price indices suggest that property price growth is slowing, with prices reducing in some areas. Nationwide building society reports that house prices were down 1.1 per cent year-on-year in February, their first annual decline since June 2020 and the weakest since November 2012. Subsequently, many portfolio investors are waiting until they see bargains or properties that fit their portfolio (a house in the same street where they already own property where they can add value, for example), before they take the plunge.

With an increase in the number of smaller landlords who hold properties in their own name deciding to sell because they are struggling to make a profit, there could be further opportunities for seasoned landlords looking to add to their portfolios. We also expect to see more flats come to market once the cladding issues with blocks are rectified. Holiday lets are another area which is becoming more popular but they require more manpower to service, so are not for everyone even though they do potentially offer good returns.

On the income side, many of SPF’s clients are purchasing further out of London as the return on their deposit funds can be higher, whereas within London and the South East the rental return is often less in percentage terms but with a higher potential capital growth. It is therefore a balance of purchasing in London with a lower immediate return but with higher potential gains, or outside of London and its vicinity, to obtain a higher yield.

Bucking this trend are houses in multiple occupation (HMOs) and multi-unit blocks (MUBs), as these provide higher yields wherever they are. A growing number of landlords are converting properties into HMOs in particular to generate stronger returns.

Rising mortgage rates

Landlords are in for a payment shock when they remortgage as rates have soared in recent months. Not only that, but if a property is held in the landlord’s own name, it can be more difficult to refinance due to stress tests used by lenders and, especially in London, the yields not fitting at higher loan-to-values.

Subsequently, there has been a significant increase in landlords using limited companies to purchase property rather than in their own name as this ownership structure can offer tax benefits as well as reduced stress levels. However, one downside of purchasing via a limited company is that mortgage rates tend to be higher than if a landlord buys in their own name.

With Swap rates, which underpin the pricing of fixed-rate mortgages, falling on the back of recent turmoil in the banking sector, this may have taken the heat out of future rate rises, with some believing that the Bank of England will hold rates at March’s meeting. Indeed, this may result in some lower-priced mortgages in coming weeks but volatility is likely for a while yet. Advice from a whole-of-market broker is more crucial than ever. 

21 March 2023

IF YOU FAIL TO KEEP UP WITH PAYMENTS ON YOUR MORTGAGE A ‘RECEIVER OF RENT’ MAY BE APPOINTED AND/OR YOUR RENTAL PROPERTY MAY BE REPOSSESSED.

SPF Private Clients Limited is authorised and regulated by the Financial Conduct Authority (FCA).The FCA does not regulate some forms of buy-to-let and commercial mortgages.