Are you a buy-to-let landlord? Ooer.

Some people think buy-to-let (BTL) is the only way to invest. However, the grounds have shifted about how property works in your investment portfolio.

This article explores the harsh reality…

Recent changes

In 2016, an additional rate of stamp duty for second properties was introduced. And then, mortgage interest relief was phased out between 2017/18 and 2020/21.

These changes increased the amount of tax payable on both the purchase of a BTL property and its rental income.

And further legislation is on its way…

New legislation

The stated aim is to make a “fairer” rental sector, but it seems to me that the Government don’t like landlords!

Among other changes, the proposed Renters (Reform) Bill will:

  • Abolish fixed-term assured tenancies and assured shorthold tenancies
  • Abolish no-fault evictions in England. You can still repossess properties where tenants exhibit anti-social behaviour or repeatedly build up rent arrears
  • If a tenant asks to keep a pet, you must not refuse their request unreasonably. You can require them to take out insurance to cover pet-related property damage

The Bill is currently at committee stage and is unlikely to receive Royal Assent until the spring of 2024 at the earliest, and maybe not until the autumn of 2024.

It will still be legal to have a blanket ban on renting to tenants in receipt of benefits or those with children, but that’s still on the list and might come later.

In addition to this, new Energy Performance legislation puts additional pressure on landlords.

Higher mortgage rates

Mortgage gearing used to be a property investor’s friend. Not any more. The base rate has risen from 0.25% to 5.25% since the start of 2022. And the average rate on a two-year fixed-rate BTL mortgage hit 6.96% on July 12. That’s the average. Some rates are nearing 10%.

Landlords on mortgage rates that were fixed at 2% will find those deals are coming to an end about now, and they might find themselves paying a painful percentage in future.

As a BTL landlord, if you were running your business by mortgage, you’ll find the interest you’re paying is now greater than the income you’re getting, which might not leave enough to repay the capital.

An average BTL in England and Wales generates rental income of £12,000. After costs, a typical landlord would expect to clear a profit of £4,490 (according to Hamptons estate agency). Due to rising mortgage costs, this is set to fall to just £1,780 for basic-rate taxpayers and only £120 a year for higher-rate taxpayers.

BTL graph
At the same time, BTL lending criteria are getting more stringent, as interest coverage ratios stipulate that the rent from the property needs to cover 125% to 145% of the interest on the loan.

You can raise rents – but not so much that they become unaffordable for tenants in your area.

If you’re paying an expensive mortgage and find you have a tenant who can’t or won’t pay, it may take a while to evict them under the new rules, and meanwhile, you’ll be losing income. At the same time, the cost of repairs and maintenance is rising sharply.

If your business is structured on a mortgage, it’s suddenly become unviable. We’re seeing many people who used to make a living from their BTL investments are now leaving the venture because they can no longer afford it.

In fact, since 2016, a total of 400,000 rental homes have been lost, according to CBRE.

  • Consultancy TwentyCi (reported in the Telegraph) says that just 241,000 private rental properties were available in June, compared with 370,000 the same month four years ago – a drop of 35%.
  • Zoopla says the number of available properties listed on its site is a third lower than before Covid.
  • In April, Foxtons, which focuses on London and the South East, had 97,000 prospective tenants on its books and just 2,000 properties to let.
  • According to the National Residential Landlords Association, one in three landlords in England and Wales are planning to cut the number of properties they rent out.
  • Hamptons suggests that around 140,000 landlords retired last year.

For landlords who don’t have a mortgage (so they are not geared to interest rates), the pressures are not the same. In fact, they may find more people are renting as they can’t afford their own mortgage rates, so there are more tenants for them to choose from.

What this means to you

Clients sometimes tell me: “I know you don’t like property”. Despite what this article says, this is not true!

I don’t dislike property investment, so long as you realise you won’t get the same income flow you used to (if you still have a mortgage). What you still get is capital appreciation – when you wait long enough – but of course, you only get the money out when you sell.

And there are issues with that, too.

One barrier to exiting the BTL arena is the Capital Gains tax bill. With fluctuating property prices, it’s difficult to plan in advance.

What’s more, unlike investments in the stock market, you can’t sell property in little bits – first the kitchen, then the bathroom, then the bedroom. It’s all or nothing.

So what should you do?

It’s a question of balance. How much money do you put in the property market compared with the stock market?

If you want to put all your money into property, go ahead, knock yourself out! But, with all the changes described above, you should really have a conversation with a specialist, especially if you’re geared and finding the costs punitive when you renew your borrowing.

Talk to us, and we’ll make an overall pie chart showing the split of your investments. If you own your own property, it’s probably already over-weighted in that direction, never mind any BTL properties you may own too.

As always, my advice is that the only ‘free lunch’ in investing is a diversified portfolio. For a financial plan that’s specific to your situation, please give me a call.

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100