Buy-to-Let Market Struggles Amid Rising Mortgage Rates

The end is nigh for buy-to-let as landlords struggle to pay rising mortgage interest rates while profits fall, claims new research by property experts. 

The report says landlords are between a rock and a hard place due to government attempts to manipulate the private rental sector.

While the Treasury has raised taxes and reduced allowable property business expenses, mortgage rates have risen to their highest level since the 2007-08 global financial crisis.

The stark reality for the thousands of landlords with fixed-rate loans about to end is that their new mortgage rates will be more than three times the rate of two-year fixes offered by banks and building societies in October 2021.

Are ministers deliberately breaking buy-to-let?

And while interest rates have soared, many landlords are paying more tax thanks to the impact of mortgage interest relief that has snatched an essential relief from higher-rate taxpayers.

The relief halves how much mortgage interest landlords can claim as a deductible business expense.

The suspicion is that ministers are trying to funnel private rental businesses away from individual landlord investors to pension investors and corporate developers.

Average rates for two and five-year fixed mortgages

According to the research from estate agency JLL, the result is that more small landlords are leaving the market, and fewer investors are keen to take their place, leaving the door open for build-to-rent partnerships.

Conquering the suburbs

Build-to-rent companies concentrated on city centre flats until recently but want to conquer the suburbs with state-of-the-art modern family homes.

The buy-to-let market is dominated by small landlords - with private individuals making up 94 per cent of the market and 0.1 per cent of rented homes owned by companies looking after 100 or more properties.

While build-to-rent homes are newly built, only 14 per cent of buy-to-lets are less than 20 years old. At least two-thirds (64 per cent) fail to reach a C energy performance rating, and 23 per cent fail a decent pass rating.

The JLL research shows renters want a suburban, family lifestyle. Most intend to stay in their rented home for at least four years and will move to another rented house after that.

“When asked what they would pay more for, while tenants in London prioritised public transport and on-site amenities, those outside of the capital highlighted private outside space (68 per cent of respondents), followed by more energy efficient housing (67 per cent),” said the report.

So what will replace buy-to-let?

SFR or single-family rentals are the likely choices for build-to-rent developers. These new homes will satisfy a growing demand for family homes to rent.

A fifth of institutional investors feel SFR properties will provide the most significant business opportunities over the next five years. The largest investors have a £12 billion war chest ready to plough into SFR.

These firms include Lloyds Bank, Aviva and Legal & General.

Build-to-rent has already finished over 20,000 homes; another 75,000 are planned in short order.

While the research sees buy-to-let rent growth declining, the opposite is expected from build-to-rent.

Buy-to-let FAQ

What’s the difference between buy to let and build to rent?

Buy-to-let homes tend to be older properties owned by individual landlords, while build-to-rent homes are more significant developments of new properties built to rent. Companies, rather than individuals more likely to own BTR homes.

Why are mortgage rates rising?

One of the main reasons for interest rate rises is that the Bank of England harnesses interest rates as a tool to control inflation. Economic thinking is to encourage people to spend less by raising the rates, which in turn, leads to a fall in prices.

What is build to rent?

Build to rent describes developments of new homes built to rent to private tenants. BTR homes often come with three-year leases and include benefits like on-site maintenance services.

How do I find a BTR home?

BTR homes are advertised like other properties to rent - with on-site marketing through local letting agents and online property portals.

Do BTR developments include affordable homes?

On average, one in five homes on a build-to-rent development comprises affordable homes.