Mortgages: is buy-to-let still a good investment?

Renting out a property provides a regular source of income that can help boost your savings or even form part of your retirement plan. 

A “chronic imbalance” between the supply of homes to rent and the level of demand from renters resulted in significant rent hikes in 2022, said Zoopla. London, Manchester and Glasgow saw the biggest hikes, at 16.1%, 14.8% and 13.1% respectively during the year.

That has continued into 2023 with average monthly rents outside London soaring to a record high of £1,190 in the first quarter, according to Rightmove. Landlords in London have also started charging tenants in the capital more than £2,500 on average for the first time.

National average asking rents outside London have gone up for 13 consecutive quarters since the end of 2019, the property website said, although the pace of growth has slowed recently and was up 1.5% on a quarterly basis.

Rents in the capital rose just 0.9% during the quarter – the smallest increase in two years.

The average rental yield – the amount landlords can receive from rents as a proportion of their property’s value – in Britain is currently at around 5.8%, according to Rightmove. This is up 0.2% annually.

Building a buy-to-let portfolio is not as cheap as it used to be and there are fewer tax benefits. Since 2016, second home owners including landlords have had to pay an extra 3% stamp duty on property purchases, adding to the cost of buying.

Pre-2016, landlords could also deduct the interest they pay on their mortgage to reduce their tax bill, but this has been restricted to the basic tax rate of 20%. 

With mortgage interest relief no longer on offer, said Unbiased, many landlords have seen their profits significantly reduce – in particular, higher rate taxpayers as they can no longer get the full 40% relief.

Landlords are also facing higher buy-to-let mortgage rates, said Which?. Rates had already been climbing but “rose sharply following the government’s mini-budget in September” and several lenders pulled products.

The number of buy-to-let mortgages on the market has rebounded to levels last seen in August 2022, before the mini-budget caused the sector to shrink, said This Is Money. But buy-to-let mortgage rates still remain “much higher than they were two years ago” at around 5%. 

Rising house prices are traditionally a benefit of buy-to-let, boosting your property’s capital value and providing a “relatively safe long-term investment”, said estate agent Ellis & Co. 

The idea is that “over the long term the value of your property should increase and provide you with a profit when you come to sell it”.

House prices appear to be dipping at the moment, which could hit landlord returns. 

Analysts have predicted house price falls this year. Both Lloyds and Halifax expected property prices to fall 8% in 2023, said MoneyWeek, while Nationwide and Zoopla predicted falls of 5%. The Office for Budget Responsibility (OBR) expects prices to fall 9% over the next two years. 

The latest official figures from the Land Registry show average house prices fell by 1% between January and February 2023, while annual growth slowed from 6.5% to 5.5%.

If property prices fall, a landlord’s capital will reduce, said Unbiased, and if you have an interest-only mortgage, “you’ll need to make up for any shortfall if the property sells for less than you bought it for”. 

Although average capital value is predicted to fall this year, Emma Wells of Leaders estate agency said in Property Reporter that “this is on the back of double-digit market growth for many properties through the pandemic and is expected to recover well within five years”. 

Demand for rental properties only looks likely to increase due to lower levels of new investment by landlords, said Zoopla, as well as a strong labour market and higher borrowing costs for home buyers. 

The number of available properties to rent was 8% higher annually as of the end of the first quarter of 2023 but is still 46% below 2019’s level, according to Rightmove. Meanwhile, the number of tenants enquiring about moving is now 4% higher than this time last year and 48% higher than 2019.

That should keep landlords busy if they need to fill properties. 

There are plenty of responsibilities involved with buy-to-let beyond simply collecting rent. 

The property needs to be in a suitable condition and meet certain energy standards, plus you may need to “respond to calls about a flooded bathroom” or “deal with the occasional nightmare tenant”, said The Times Money Mentor. 

You could get a letting agent to help, said The Money Edit, and charges are likely to be the equivalent of a month’s rent for finding tenants, while full management can eat up between 12 and 20% of your monthly rental. 

Another option is to manage this yourself, but it can be time-consuming, the financial website added, “and, if you’ve not had experience of managing a rental property before, it could prove a false economy”.