The buy-to-rent dividend has hit a record low level, raising fears that real estate investors will sell up. Landlords may soon reverse a loss as higher interest rates bite, while government purchases to let tax intervention further amplify the pain of sky-high mortgage costs.
At the national level, the gross rental return is already at a record low level of 4.38 per cent. This is because house prices have risen faster than rents.
The research consulting firm Capital Economics has predicted that interest rates by the end of 2022 will reach a new low of 4.26 per cent. As interest rate rises push up landlords’ payments, the margin between rental income and mortgage costs next year will be the most pressured it has been since the financial crisis.
Bank of England decision to raise bank interest rate to 1.25% will cause the average net profit on a new buy-to-rent property to fall by 15 per cent. for a landlord who pays higher taxes, according to Hampton realtors.
In London, an investor paying higher taxes will see their net profits fall by £ 840 a year – 29 per cent. less than before the rise in interest rates.
“It will only take the bank interest rate to reach 2 percent before the average landlord at higher tax rates would see their profits more than halved,” said Aneisha Beveridge of the Hamptons.
Capital Economics has predicted that the bank interest rate will hit 3 per cent. next year, but a typical buy-to-let will be loss-making much faster.
An average landlord at the higher tax rate will see that their investment becomes a loss if the bank interest rate hits 2.75 per cent. At this point, a typical home loan interest rate will be 4.11 per cent, meaning they will lose £ 97 per annum. property per year. At 3 per cent. their annual losses would increase to £ 403.
London landlords will be hardest hit, Beveridge said. “Here, profits would fall by 59 per cent if the bank interest rate rose to 1.5 per cent,” she said. If interest rates rise to 2%, a typical London landlord will lose £ 501 a year per annum. property. At 3 per cent. the annual loss would be £ 2,180.