A new landlord that bought with a 25% deposit last year would have only seen a profit of £760 this year, highlighting how returns are being cut by rising mortgage rates.
The research comes from Hampton’s buy-to-let report, which found that landlords using a limited company or a lower rate taxpayer would need to earn a gross yield in excess of 4% to turn a profit. This applies for landlords with a £200,000 buy-to-let with a 60% LTV mortgage.
in 2020, when rates were lower, investors could still make money with yields of 2%,
It’s worse for higher-rate taxpayers, who would need a yield of at least 5% to make money once mortgage payments, maintenance costs and tax have been taken into account.
Hamptons wrote: “Taken together, higher interest rates and government reform of the sector is likely to make buy-to-let a longer-term game.
“Slower price growth will make it less tempting to sell up and cash in, while the additional time it takes to build equity means it will be slower to scale up.
“Therefore, we expect landlords who are buying today to own the property for considerably longer than an investor who bought in a decade ago.
“Fundamentally, though, longer investment horizons will quietly push landlords towards quality over quantity.
“Slower price growth also means the market will become less forgiving when it comes to bailing landlords out of poorer purchases.
“But, with rent increasingly accounting for the vast bulk of an investor’s return, the incentive to find a low-risk tenant and provide a home which keeps them content will never be higher.”
Most existing investors have seen their yields increase over time due to rising rents, helping to cushion against higher expenses.
However, rents would need to rise by a staggering 28% across England and Wales to compensate for the increase in mortgage rates to 5% over the past year.
Investors who purchased properties in 2015 experienced an initial average gross yield of 6.1%, which has now risen to an average of 7.3% relative to the original purchase price.
Landlords who entered the market in 2021 have already seen a 0.6% increase in their yield, going some way to insulating them from the impact of rising interest rates.
