Rate rise puts brakes on investment property sales

Any property investor entering the market in recent years should have found it fairly simple to make money. Rental yields have been at a premium to interest rates, and phenomenal house price growth has meant that even unseasoned landlords have pocketed significant profits.

But as interest rates rise and the brakes go on property price rises, it seems the tide could be turning. According to some mortgage brokers, many landlords are finding it tougher to find new buy-to-let investments.

Landlord Mortgages, a specialist buy-to-let mortgage broker, says there has been a sharp slowdown in the number of purchases being made by investors in recent weeks, while some estate agents have seen a rise in the number of amateur landlords selling up and banking profits.

Lee Grandin, director of Landlord Mortgages, says: “Many landlords are facing a dilemma as the rising cost of borrowing means that rents may be less than their mortgage interest.

“In the last two or three weeks the figures aren’t stacking up as well. Landlords are having to find bigger deposits to make their mortgage work, and this in turn limits the number of properties they can buy.”

Tim Hyatt, head of UK letting at Knight Frank, the estate agency, has recently seen a significant increase in the number of letting properties coming up for sale. “It seems that landlords are reassessing their position and deciding either to stay in for the long term or to sell up,” he says. “We have seen 10-15 per cent of our lettings being put up for sale in the last six months or so, whereas normally this figure is minimal.”

Those selling are likely to be amateur property investors, who are struggling to make the figures work. Investors are seeing greater shortfalls between the rents they receive and the interest they are having to pay on their mortgage.

Net rental yields – which factor in property maintenance costs and periods when properties stand empty – have fallen in recent years from around 7 per cent to as low as 3.5 per cent in prime property areas. This is significantly lower than the typical fixed mortgage rate of 5.3 per cent for buy-to-let loans, meaning landlords are having to top up monthly mortgage interest payments from other income.

Fortunately for borrowers, lenders have been adapting to these changes by relaxing criteria. While historically they have insisted that the rent on a buy-to-let property covers the mortgage interest by 130 per cent, now a number of specialist lenders just ask that the rent covers 100 per cent of the mortgage interest. This leaves no margin for void periods and maintenance, nor any cushion to absorb further rate rises.

Lenders say they are increasingly taking account of the property owner’s individual credit status and income – and therefore how affordable payments are – when they offer buy-to-let loans. Some lenders, however, are offering loans with low rental cover without requiring proof of income.

Some comfort can be drawn from the current outlook for rents, which is significantly more positive than it has been. But even so, rents are not rising quickly enough to absorb fully the increases to mortgage costs.

Paragon Mortgages says average rents rose 6.5 per cent over the last three months, with the fastest increases in London, followed by the south-west and south-east.

Knight Frank believes rents could rise as much as 12-15 per cent this year, although not all landlords will be able to pass on these rises immediately.

Nigel Terrington, chief executive of Paragon Mortgages, argues that increasing interest rates can drive up demand for rental accommodation as tenants may be forced to delay purchasing a property.

“Landlords often have the ability to cope with rate rises better than owner-occupiers as they can pass on the rises to tenants,” he says. “Tenant demand is currently high, and rental levels are going up quite strongly.”

Nevertheless, letting experts say that anyone thinking of going into the buy-to-let market should be prepared to be in for the long term.

Hyatt says the average term for a buy-to-let investment is 17 years. “The key now is capital appreciation rather than income,” he says.

Agents say landlords need to choose their purchases more carefully, as yields can vary between locations and property types.

Terrington says: “You can typically expect higher yields the further north you go. London tends to be a high capital value low-yield area.” Even yields in London can vary from around 4 per cent to more than 10 per cent, according to Landlord Mortgages.

Lucian Cook, director of residential research at Savills L&P, says that choosing the right property is critical. “This means avoiding over-supplied markets, for example new-build flats in some city centres, and looking for prospective rental growth where there is a shortage of stock.”