Is it time to give up on buy-to-let?

Investors are fleeing the market as higher mortgage costs eat into rental income, but buy-to-let mortgages are staging a comeback.

Profits from buy-to-let properties have fallen to an all-time low due to a combination of high-interest rates on buy-to-let mortgages and the cost of living crisis, says online property specialist My Auction.

For the first time in 14 years, mortgage payments are exceeding rental incomes. Interest rates on buy-to-let mortgages have risen rapidly over the last year as the Bank of England (BoE) has hiked interest rates, pushing up borrowing costs across the board. 

In the past, low borrowing costs and rising property values made buy-to-let an attractive investment. 

But house prices began falling in the second half of 2023, and are expected to continue falling throughout 2023, meaning property might not be the lucrative investment it once was.

The headwinds facing the property market are not expected to go away anytime soon. The BoE raised interest rates to 4% when it met in early February, and markets are pricing in a further increase of between 0.25% and 0.50% when its next decision is published in late March. 

Additionally, while inflation is forecast to halve by the end of 2023, households remain under pressure from rising prices and would-be buyers are retreating from the market in droves – mortgage borrowing fell by £1bn between November and December

That said, the latest data from MoneyFacts shows buy-to-let product availability has improved month-on-month, returning to levels not seen since August 2022. 

There are now 2,400 options available, the highest since July 2022 – an encouraging sign the market might be starting to stabilise following the shock of the mini-Budget in September. 

But the headwinds facing the market remain, and the current buy-to-let products on the market are more expensive than the ones available to landlords two years ago. 

So is it time to give up on buy-to-let?

Buy-to-let investors are fleeing the market

Data from My Auction shows 38% of their current property auction lots are buy-to-let investors looking to exit the market, with landlords selling for 25% to 30% less than they would have asked for previously.

But this isn’t all down to profit margins. 

“The interest rate rises have solidified and sped up the mass exodus of buy-to-let investors from the market. However, other contributing factors, such as the consistent changes in legislation and taxation surrounding landlords in this section of the market, have made it almost unviable for some landlords to retain their investment properties,” says Stuart Collar-Brown, co-founder and director of My Auction.

Buy-to-let properties incur a 3% surcharge on top of the standard rate of stamp duty tax, and buy-to-let income is also subject to income tax. As fiscal drag pushes more people into higher tax bands, landlords are going to find themselves paying more tax (the rules on stamp duty and tax on income are different for landlords that use limited companies to invest in property).

Additionally, mortgage interest tax relief has become far less generous over the last couple of years. 

Changes to the system made in 2020 mean higher or additional-rate taxpayers are no longer able to claim the tax back on their mortgage repayments. Now, they can only receive refunds at the basic 20% rate, another cost they have to consider when renting out properties (once again the rules are different for limited company property investors). 

And while some landlords have been able to pass higher buy-to-let mortgage costs onto their tenants, there’s a limit to what renters can afford to pay.

Rents across the UK have risen to record highs, but they can’t go up indefinitely. Large numbers of renters are already struggling to pay their bills.

Buy-to-let mortgages make a comeback

The latest data from Moneyfacts showed buy-to-let product availability has improved, and average fixed rates have fallen month-on-month both for two and five-year fixed term products. 

The average two- and five-year fixed rates are currently over 5%, compared to 3% this time last year meaning landlords coming off fixed-rates now will face higher repayments. 

“The choice of deals to landlords plummeted and both the average two and five-year fixed rates rose to 6% towards the tail end of 2022, but thankfully, both rates have slowly dipped below this level,” says Rachel Springall, finance expert at Moneyfacts. 

“The drop in average buy-to-let rates appear more subdued than seen within the residential mortgage sector, but lenders have made moves to entice new business despite some investors’ concerns surrounding rental income margins,” Springall continues. 

But given that landlords are facing changes to capital gains tax and tax on holiday lets, as well as EPC requirements, it would be unsurprising if the number of those looking to sell up this year increases. 

“Landlords may be waiting for fixed mortgage rates to come down further or indeed opt for a tracker mortgage to give them more flexibility to eventually switch their deal,” says Springall. 

“However, interest rates are only part of the decision-making process when entering a buy-to-let investment. Whether that be for new or existing landlords, it is always wise to seek advice to ensure it is the right time to commit to a deal.”

So is it time to give up on buy-to-let? 

“Buy-to-let property investment was once a very popular form of retirement planning in the UK, as it has offered the potential for steady rental income and capital appreciation,” says Karen Noye, mortgage expert at Quilter. 

“However, recent changes to the tax system including the withdrawal of mortgage interest relief and increased interest rates have reduced the profitability of buy-to-let investments.”

“While still a viable option for some it may be worth considering alternative retirement planning options like maximising the use of tax-efficient wrappers such as pensions and ISAs each year,” adds Noye. 

“Landlords who have had a property for many years may also have seen the property skyrocket in value so they may simply sell the investment, release the equity and then use that to fund retirement although this will not provide an income stream. With the capital gains tax allowance reducing going forward, there may not be as much profit as first thought.”

But investors with spare cash might be able to use the current market conditions to their advantage. With some landlords willing to take a capital hit to get out of the market quickly, those with cash to spare might be able to snap up a bargain. 

Indeed, cash buyers are securing discounts of up to £88,000.

Additionally, it looks as if the mortgage market is starting to cool down after several months of volatility. 

HSBC recently became the first mortgage lender to offer a product with a rate lower than the Bank of England’s base rate since September, and a price war could be upon us as lenders compete for business. 

“The buy-to-let sector faced notable market turmoil towards the tail end of 2022, but product choice is gradually returning,” says Springall.

“A rise in choice could indicate an encouraging sentiment across lenders that appear to be adjusting their ranges to cater to landlords searching for a new deal.”

“Landlords will be paying higher interest rates than if they secured a deal a year ago but there are high expectations that interest rates will come down this year, so it would not be too surprising if landlords wait a little longer before they refinance,” Springall adds. 

“Any investor will need to carefully balance their rental expectations amid rising costs as it is difficult to tell how investors could be impacted this year. It’s essential any potential borrower seeks independent financial advice before entering any arrangement to ensure it’s the right choice for them.”

Landlords willing to stick it also could also be rewarded with higher rents. According to Zoopla, the stock of rental homes has been the same since 2016, and this lack of supply is pushing up rents across the country. 

While Rightmove expects the pace of annual rental growth to ease to around 5% by the end of 2023, it’s still above the 2% average the sector saw before the pandemic. 

Ultimately, the outlook for the buy-to-let market is pretty mixed. With the cost of borrowing set to remain high, and the government looking for new ways to tax wealth, it could make sense for some investors to sell up. 

On the other hand, professional landlords who are willing to ride out the storm may be able to take advantage of opportunities as they emerge.


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