‘The band has stopped playing’ for UK landlords

Many buy-to-let investors are now confronted with the choice of increasing rents or selling up, as the average buy-to-let fixed-mortgage rate edges further above 6 per cent. 

For months, brokers have been reporting a die off of new buy-to-let enquiries, and many had previously warned that more trouble was brewing as a result of stringent stress-testing by lenders. 

I’ve been a mortgage broker for years and I’ve never seen the market like this Zara Yeganeh, KeyRate

The situation has deteriorated further in recent weeks with lenders continuing to hike rates and further tighten stress-testing.

Earlier this week, NatWest, one of the UK’s largest mortgage lenders, increased the stress test on its two-year fixed-rate buy-to-let mortgage from 6.7 per cent to 8.10 per cent and upped it from 6 per cent to 6.89 per cent on its five-year fixed product. 

“I’ve been a mortgage broker for years and I’ve never seen the market like this,” self-employed broker, Zara Yeganeh told FTAdviser. 

Yeganeh explained that over the last two weeks, the monthly payments on every buy-to-let case she completed have at least doubled. 

In Yeganeh’s view, the combination of difficulties present in the buy-to-let sector - high rates, taxation issues, inconsistent valuations, affordability problems - are all about to coalesce and “crash the market”. 

Yesterday, a report from the Intermediary Mortgage Lenders Association flagged similar issues, with the trade body being highly critical of the impact proposed legislative changes may have on the sector. 

While many specialist buy-to-let lenders have now returned to the market this week, the arrangement fees have all increased and Yeganeh pointed out that while she is still getting some new enquiries from potential buy-to-let investors, they are only coming from people with hefty deposits. 

The buy-to-let mortgage market is currently so uncompetitive that Yeganeh said all of her portfolio landlords coming off their fixed rates have had no choice but to do a product transfer with their existing lenders. 

We have spoken with five this week who are planning to offload some or all of their portfolio Martin Stewart, London Money

Similar to Yeganeh, mortgage brokerage London Money has analysed all of its buy-to-let remortgages since the beginning of the year and on average each has seen a 102 per cent increase in the monthly mortgage payment. 

“This has led to a number of landlords now choosing to exit the market and we have spoken with five this week who are planning to offload some or all of their portfolio,” London Money’s founder Martin Stewart told FTAdviser. 

“These properties are held in their individual names and so we may now see the market polarise between those who tickled with the sector and those who incorporated their portfolio and view it as a long term play. 

“The latter are likely to stay in the market, certainly for the time being although every buy-to-let has a tipping point,” Stewart said. 

He added: “The risk to those exiting the market now is obvious, the lifeboats are filling up fast and the band have stopped playing.”

Jiten Varsani, a mortgage adviser at London Money said for investors with big deposits, the sector is still profitable but it is the higher leveraged landlord’s who are seeing the biggest challenges. 

“Particularly where rental income is not proportionately achievable,” Varsani explained. 

Varsani provided two examples of recent remortgages, both by landlords in North West London. 

In both cases the interest rate has shot up by more than 3 per cent.

Landlord 1: 

Loan: £279,125

LTV: 47.08 per cent

Basis: Interest Only

Current Payment: £360.03 per month (pm) (Fixed-rate: 1.55 per cent)

New Payment: £1,102.54pm (Fixed-rate: 4.74 per cent)

Rental Income: £2,300pm 

Landlord 2: 

Loan: £568,191

LTV: 61.7 per cent

Basis: Interest Only

Current Payment: £946.22pm (2.0 per cent)

New Payment: £2,423.10pm (5.1 per cent)

Rental Income: £2,600pm

“Taking into account agent fees, accounting fees, repairs, rental voids, personal income etc., there will need to be some serious consideration given to whether or not these will be feasible going forward,” Varsani said. 

Things can only get..worse? 

Looking ahead, many more buy-to-let landlords are about to face a crunch this year, which in turn will pile the pressure on their tenants. 

According to data from UK Finance, there are currently 2mn buy-to-let mortgages outstanding across the UK with around 1.3mn of these on fixed rates. 

Of these, around 230,000 fixed deals are due to expire between March 2023 and March 2024 meaning that many renters are exposed to potentially significant rental hikes in the coming year. 

Some brokers have noted a shift away from longer-term property letting to short-term holiday lets in response to the constrained profit margins. 

We have definitely seen a decrease in new buy-to-let enquiries for both remortgage and new purchase. However, interestingly we have seen an increase in holiday let and Airbnb enquiries in recent months,” Louis Mason, communications manager for brokerage Oportfolio told FTAdviser. 

Mason said this is likely due to the increase in income that can be achieved by letting properties out on a daily or weekly basis compared to long-term lets and noted the difficulties traditional buy-to-let investors are currently facing.

“The increase in people wanting to holiday in the UK rather than abroad to save money during the economic crisis is undoubtedly a reason why Airbnb and holiday let are becoming more prominent,” Mason said. 

“We have had a client recently who was looking to remortgage one of his buy-to-let properties. He had previously come to us earlier in the year and we assessed his maximum loan at £300,000 with TMW. 

“He was just enquiring at the time, so we didn’t proceed with anything. He came back to us recently wanting to proceed with TMW. Due to new changes to rental income stress tests and general affordability test his maximum mortgage came back at £160,000.

“Thankfully, we have found another lender for him who can provide him with the level of mortgage that he needs, but his payments have now gone up by a minimum of £200 a month,” Mason said.

He added: “It’s a tough market for landlords now, and it is a real skill to be able to get a mortgage deal that not only makes financial sense for them as an investor but will also ensure that their loyal tenants aren’t being overcharged and lost.”

jane.matthews@ft.com

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