Only landlords with lower levels of borrowing can now trade in profit, research from Savills has suggested.
The research found the average buy-to-let investor with a 70 per cent loan-to-value mortgage would have generated cash loss in each of the last four quarters.
It described this as a “dramatic shift” from the period beginning 2014 to the end of 2021, when it was possible to deliver an average cash profit (after tax) equivalent to 23 per cent of the gross rent with borrowing at 70 per cent of a property’s value.
Savills head of residential research, Lucian Cook, said, while it’s difficult to pinpoint evidence of a pick up in landlords selling, higher mortgage rates and restricted tax relief in interest payments have “made it harder” for mortgaged buy-to-let investors to generate cash profits.
“This is despite a shift in headline yields, which have moved from an average of 5.3 per cent to 6.3 per cent over the past two years,” he added.
“As a consequence, we have seen a sizable fall in investment from those needing a mortgage, with a shift in their focus to properties in lower-value markets that deliver higher yields.
“The higher interest rate environment has laid bare the impact of restricted tax relief for smaller scale landlords investing personally.
“As a result, the market has shifted more towards larger, equity-rich landlords who are more likely to hold their investment portfolio through a company.
“This group has benefited far more from recent rental growth and has also been less deterred by the prospect of greater regulation in the private rented sector.”
Savills calculations also showed that, in the event that mortgage rates fall by 1 per cent, the profitability for the average landlord on a 70 per cent LTV mortgage would go from a £120 loss to a £1,200 cash profit a year.
Meanwhile, someone with a 50 per cent borrowing requirement would see their profit go from £1,950 to £2,900.
“While we are likely to see a slightly wider range of investment buyers as interest rates fall it seems highly unlikely that buy-to-let lending volumes will return to where they have been in the past,” Cook added.
tom.dunstan@ft.com
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