‘Very Real Risk’ of Landlords Exiting Rental Market Amid Soaring Mortgage Rates

Terraced houses in southeast London on Jan. 13, 2023. Daniel Leal/AFP via Getty Images

There is a “very real risk” of landlords quitting the rental market under the pressure of soaring mortgage rates, a property firm has warned.

According to research conducted by Savills, Investors’ net profits fell below 4 percent in the first quarter of 2023, marking a “dramatic shift in finances” for mortgaged buy-to-let buyers.

Average net profits for landlords are now at their lowest since 2007, due to the impact of 12 successive increases to the interest rates, exacerbated by restricted tax relief, the firm said.

Lucian Cook, head of residential research at Savills said: “Following a boom period for buy-to-let landlords, 2023 marks a turning point for Britain’s private rented sector.

“Between 2014 and 2021, landlords on average were making ‘year one’ cash profits of 23 percent of rental income, but successive interest rate hikes have seen this figure plummet to under 4 percent this year.

He added, “There is a very real risk that landlords will exit the sector, particularly those with high levels of borrowing, putting increased pressure on a sector where demand significantly outweighs supply in many locations.”

Debt Exposure

According to Savills, though tenant demand has been growing, landlords’ ability to continue to make a margin will depend on debt exposure.

Cook said: “Debt exposure of mortgaged buy-to-let landlords will play a critical role in the future shape of the private rented sector. Viability will be a real issue for smaller landlords with higher levels of debt who are coming to the end of their fixed rate, while larger, wealthier landlords are in a much better position to benefit from the rental growth seen in the period post pandemic.”

He added: “Future investment is now likely to be dominated by cash buyers and those with low borrowing requirements.”

Added to this, many landlords who have been active since buy-to-let took off in the early 2000s are now nearing or in retirement, which risks limiting the future supply of rental stock.

Rising Rates

A view of the Bank of England in London, on Feb. 2, 2023. Yui Mok/PA Media

The Bank of England (BoE) has raised rates 12 times in a row to 4.5 percent from 0.1 percent in December 2021.

The Consumer Prices Index (CPI) of inflation fell from 10.1 percent in March to 8.7 percent in April, but has remained higher than economists had predicted.

Figures released on Tuesday showed that average regular wages, not including bonuses, jumped 7.2 percent higher in the three months to April, up from 6.8 percent in the three months to March and higher than expected.

Experts have said that the figures would raise the chances of another base rate hike next week.

Mortgage lenders have already been temporarily restricting the availability of mortgage deals and hiking rates as financial markets now believe interest rates may need to rise from 4.5 percent currently to 5.5 percent or even higher.

On Monday, Santander announced a temporary pause on some mortgage applications, amid “changing market conditions.”

The bank plans to relaunch a full range of mortgage products on Wednesday and said that from Monday evening it would not be accepting new applications via intermediary and online channels.

On Thursday last week, HSBC UK made the decision to temporarily withdraw mortgage rates available via broker services, to help to ensure the bank could stay within its operational capacity.

Its mortgages are now back on sale through brokers, although its rates have increased by between 0.10 percentage points and 0.45 percentage points.

Across the mortgage market, average fixed-rate mortgage rates have been moving close to 6 percent.

According to financial information website Moneyfacts, the average two-year fixed-rate mortgage on the market was 5.90 percent on Tuesday, while the average five-year fixed-rate was 5.55 percent.

PA Media contributed to this report.