In Focus: Home ownership  

BTL profit margins are ‘taking a battering’

BTL profit margins are ‘taking a battering’

Buy-to-let investors are seeing their profit margins take “a battering” as fixed rates and stress tests remain at a peak.

Mortgage advisers and brokers have told FTAdviser that some clients are paying as much as £800 extra a month on their buy-to-let mortgages, as the market continues to feel the effects of Liz Truss’s “mini”-Budget.

Kent-based mortgage broker, Paul Holland said the higher interest rates seen in the last month have made conversations with clients coming to the end of their fixed-rate term “pretty grim”.

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“People with a BTL mortgage that we've dealt with have predominantly opted for a product switch and the rental is still covering the repayments but their profit margin is taking a battering,” Holland said.

One of his clients, with an existing loan amount of £160,000 on an interest only basis, is due to fall out of his fixed rate in June 2023. 

The client is currently on a 3.34 per cent 2 year-fixed rate with repayments of £330 per month. 

The most competitive option at the moment for the client is 6.24 per cent for a 2 year fixed-rate, which would see the repayments jump to £840, an additional £510 per month.

The rental income currently charged on the property is £950, which would leave only £110 after paying the mortgage if the rent remained unchanged.

Another one of Holland’s clients is due to come to the end of their fixed-rate in April next year. 

With a 2.25 per cent fix on the current loan of £240,000, the most competitive rate he is currently able to get with the existing lender (5.79 per cent) would see the client’s repayments shoot up to £1,158 per month from £340 currently.

The rental income on this property is currently £1,250, which would leave only £92 after paying the mortgage.

"Both examples have tenants who are long standing and although they could increase the rent, they are sceptical as they don’t want to upset the apple cart," Holland told FTAdviser.

Holland said new buy-to-let enquiries have "all but died" in the last month.

“To be quite frank, lenders haven't done enough and they seem to be looking after number one rather than their customers. 

“Hopefully the next announcement/budget will settle things somewhat and restore some normality to the market."

He added: "The new 'normal' being different than what we've been used to of course."

Data released earlier this week, showed that landlords in the UK have seen an 18 per cent increase in their estimated total rental income in the past year, but interest rate rises look set to eat into these returns.

Whether these higher rates will mean a large-scale exodus from the market remains yet to be seen. 

London Money director, Martin Stewart said it will be next year before any trends are visible.