Landlords of owner-occupied homes are feeling the tension

Rising interest rates and regulatory changes are heightening risks for businesses mortgaged for rent, already under pressure from the loss of tax relief, new research that tracks the growth of the UK sector over 30 years shows.

As landlord-tenant relations in many parts of the country have come under strain from the cost-of-living crisis and sharp rent increases, the government has announced new laws aimed at modernizing leases and resolving of disputes.

However, the changes threaten at a time when the financial viability of many mortgage investors is threatened by sharp rises in interest rates.

What does the research say?
The number of landlords in the private rented sector has exploded from 1.7 million in 1989 — when the advent of insured rent for households in its modern form gave landlords greater flexibility over rents and lease terms — to 4.6 million today, according to the study from estate agent Savills.

While the legislative changes laid the groundwork for growth, the sector didn’t really take off until the 2000s, when specialist buy-to-let mortgages became widely available – and the landlord business became a mainstream investment option for many middle-class Britons.

This growth was briefly curbed by the financial crisis in 2008-2009, and more recently by restrictions on the tax credit for mortgage interest payments, which were phased out over the four years leading up to 2020.

By removing the ability for individual owner-occupied homeowners to offset their mortgage interest costs against tax at their personal rate, the measures have hurt their profits – and their effects have been amplified as rates have risen over the past year.

Lucian Cook, director of residential research at Savills, said: “During an extended period of low interest rates, the potential impact of that tax relief limitation was concealed because it did not necessarily have a material impact on landlords’ finances. But it has really shown its hand as we start to see rate hikes.

Savills gave the example of a buy-to-let investor with a 70 percent loan-to-value mortgage who pays income tax at the higher rate. Last year it said a landlord with a £236,000 property would have made an average profit of 23 per cent of his rental income – even after tax. That has now fallen to 3.9 percent.

What Happened to Landlord Interest Rates?
According to financial site Moneyfacts, buy-to-let mortgage rates have nearly doubled since March 2022, with significant increases over the past two weeks. Both two- and five-year fixes are currently charged an average of 6.03 percent, compared to 3.05 percent and 3.29 percent, respectively, in March last year.

This week included TSB — with increases of up to 0.75 percentage points — and The Mortgage Works, a subsidiary of Nationwide, and a slew of building societies raised their buy-to-let rates.

How do landlords react?
In its monthly survey of the opinion of estate agents and lettings, the Royal Institution of Chartered Surveyors said on Thursday that interest rate rises, as well as changes in the pipeline with the tenant reform bill, are leading landlords to put more properties up for sale.

Rics senior economist Tarrant Parsons said: “Interest rate rises are also impacting the rental sector and coupled with the impending reforms proposed in the Government’s Tenant Reform Act, landlords are increasingly deciding to to vacate and sell property, further limiting rentals. delivery.”

Comments from estate agents about the state of the market showed that landlords were nervous about the measures. Richard Franklin of Worcestershire-based estate agent Franklin Gallimore said the legislation “caused supply to dry up and rents to rise. More formal notices are being made than in recent history, which doesn’t bode well.”

However, Cook of Savills said fears of a return to the 1970s, when rents were regulated and tenants could only be evicted on breach of rent, were exaggerated. While the new legislation involves replacing fixed-term leases with periodic leases, which have no end date, landlords have the right to terminate a lease if they wish to sell the property, neutralizing the risk of a decrease in value.

How will the sector change in the longer term?
The landlord market will increasingly favor cash buyers or those with a lot of equity in their properties or who have lower levels of debt, Savills said. But the majority of individual mortgaged landlords were still looking for substantial loans last year, with the average loan-to-value ratio on new buy-to-let mortgages reaching 72 per cent by 2022, according to UK Finance.

Higher rates also reinforce the trend of holding property in a private company, with profits unaffected by the disappearance of the income tax credit. Users of these structures are typically landlords with a portfolio of four properties or more, who often run the business full-time.

But Cook warned that the loss of the Section 21 clause, which currently allows landlords to terminate a lease without a specific reason, poses problems for lower-income households looking for rental properties.

“Ultimately, there is a risk that landlords simply go with more affluent tenants who they believe offer more security in terms of rent payments in the long term. If we see less availability of rental stock, it could mean that those problems end up with people in lower socio-economic groups.”