The Current State of the Buy-to-Let Market
For the past 12 – 18 months, mortgage interest rates have been steadily on the rise. The Bank of England raised the base rate 14 times consecutively since 2021 – before voting to hold the rate at 5.25% in October 2023 – but rates are still at their highest level since 2008.
Needless to say, this has had far reaching consequences for all aspects of the mortgage market, but this article will focus on the buy-to-let mortgage market, and the ways in which the current economic climate is affecting current and would be landlords.
Note: If you are considering the buy-to-let market please seek expert advice from a qualified mortgage advisor who will be able to assess your circumstances and provide personalised advice.
How the Current Economic Climate Affects Buy-to-Let Mortgages
Lenders use a calculation to stress test whether or not the rental income for a buy-to-let property will cover the mortgage payments when deciding how much to lend. If interest rates are higher, this means less rental coverage, and the borrowing amounts on offer are currently much lower than in previous years as a result.
For those with existing mortgages, this may mean that a remortgage is not possible as the rental income is no longer deemed by most lenders to provide adequate coverage, and lenders view this as too risky as a result. Even if you have not borrowed any additional funds since the mortgage was taken out to begin with, you may find there are very few or no options to remortgage to a new lender when you have a fixed rate coming to an end, particularly for loans with a higher loan-to-value (LTV). A product transfer – choosing a new product with your existing lender – should still be available in most cases, but it means borrowers won’t have the luxury of shopping around for better rates which may be available elsewhere. An independent mortgage broker will be able to let you know what is viable and lowest in cost.
For those considering purchasing a new property, reduced borrowing capacity means a higher deposit is likely to be required. Loans of 75%-80% of the property value are still theoretically available, but in practice this is not achievable in the vast majority of cases at present. Realistically, you can expect to require a deposit of 40% or more unless the rental yield for the property in question is particularly strong. It may be possible to increase the borrowing by factoring in surplus earned income with some lenders – known as ‘top-slicing’ – but for most people the additional capital required for deposits creates a higher bar for entry to the buy-to-let market.
Should I Get a Buy-to-Let in 2023?
The current economic situation has undoubtedly slowed down the market for new buy-to-let purchases in recent times, and led to existing landlords contemplating whether or not to sell their investment properties when profit margins become squeezed. Here are some of the factors current and would be landlords should be thinking about when deciding whether a buy-to-let is right for them:
Are you taking a long-term view?
According to data available on Land Registry, the average property price in January 2000, on the turn of the millennium, was c. £75,000. Ten years later, the average price rose to more than double that at c. £174,500 in January 2010, before rising c. £248,000 by January 2020. As of August 2023, the average price is c. £310,000. Of course there are times when property prices slump, but historically property in the UK is a relatively stable, worthwhile asset to hold.
Are you investing for income or capital growth?
The growth in the value of the property over time will provide capital growth, whereas the rental income generates regular income. In time such as these, rental profits becomes squeezed, and there may be times when the property is untenanted, and not generating income at all. Landlords need to consider how much a short term drop in rental profit is worth withstanding for the potential for long-term capital growth, what impact this has on their own monthly finances, and whether they can afford to service a more expensive mortgage (as well as their own residential mortgage if they have one) with potentially less rental coverage.
Are you expecting a quick return?
Following on from the points above, buy-to-let properties will be subject to a higher rate of Stamp Duty Land Tax on purchase (+ 3%), meaning higher initial costs, and with property price growth slower at present than in previous years, a medium-long term view is likely to be required.
Are you prepared to be a landlord?
Being a landlord is a big responsibility, and tenants are directly impacted by the current climate of higher interest rates by landlords who attempt to increase rents in order to maintain a profit margin. It is for the individual to ask themselves to what extent they can justify doing so whilst bearing in mind everybody is affected by the increased cost of living. If tenants cannot afford higher levels of rent, compromise may be required. It is not a given that your buy-to-let property will always generate a profit, and being a landlord comes with obligations. Properties in areas with better rental yields may not be located close to the where the landlord lives, and landlords should consider if they’re able to fulfil their obligations to tenants practically. The stocks and shares you could invest in instead are not likely to call you on a weekend about property maintenance requiring your attention – being a landlord might not be right for everyone.
The Potential for Opportunity
Many current Buy-to-Let investors are reconsidering the market now given higher mortgage costs / lower borrowing / greater landlord responsibilities. As a result a number of these properties will end up going to homeowners, not landlords. This will reduce the BTL property stock.
Should this continue it is highly likely that rental prices would go up (basic supply and demand) so new or existing landlords could have opportunities to buy in a market where house prices have fallen / falling and rents could be due for a reasonable period of increases.
In summary, the buy-to-let market is more difficult to enter for the first time in many years, with loan amounts and rental profit margins diminished. For those with existing mortgages, the options for refinancing are far fewer.
Despite that, there is no need to panic and sell existing property holdings due to what is – hopefully – short-term pain. Buy-to-let is still a viable option for the right investor, investing for the right reasons, with realistic expectations about the availability of finance and the timescales that may be required to realise a meaningful return.