The situation is looking grim for Britain’s 400,000 buy-to-let investors – and it’s set to get worse. With interest rates now a full percentage point higher than they were last year, many landlords are finding that rental income doesn’t cover their mortgage repayments.
“The buy-to-let market is certainly getting tougher,” says Melanie Bien from Savills in The Observer. Large numbers of buy-to-let investors are coming to the end of their fixed-interest periods and face the looming problem of higher monthly repayments. For example, the increase in the base rate to 5.5% has added £125 a month to repayments on an interest-only, variable-rate mortgage of £150,000.
Usually, the solution would be to raise rents. But amateur landlords are having difficulty in passing on their rising costs. Tenants are often protected from rent rises by six or 12-month contracts, which delay any possible increase. Besides, landlords are reluctant to raise rents as increased competition and a market that is quickly becoming oversupplied means empty properties are a real danger.
“The number of properties up for lease is high and prices are very competitive,” warns Julien Holmes, managing director of Crown Mortgage Management in The Daily Telegraph. The company, which chases debts for mortgage lenders, has reported a recent rise in arrears and repossessions of properties owned by first-time landlords. Holmes says: “With novice landlords it’s potentially a case of ‘have they done their maths?’”
Of course, many of these new buy-to-let investors say they are happy to accept monthly losses in order to hang on for capital gains. In a survey for The Times, almost all those questioned were “philosophical about having to subsidise property investment as rents fails to reflect higher house prices; they say their homes are a long-term investment”.
But as we reported last week, house-price growth (outside Scotland, Northern Ireland and London) is starting to slow across the UK (see: House prices are on a knife-edge) – so investors are in danger of losing their capital gains too. Mindful of this risk, many landlords – no doubt those who have been in the market the longest – are selling up while they can still bank some gains. According to figures from the Royal Institution of Chartered Surveyors, the number of buy-to-let investors selling their properties once they reach the end of their tenancy contract is at its highest level in two years.
The FT highlights another problem. “Property experts are warning that skewed supply, and too many of the wrong types of properties, could result in certain pockets of the housing market becoming saturated.” The main area of over-supply is flats – the favoured choice of the buy-to-let brigade. At present, these only account for 20% of the property market, but in the past year, 45% of all new builds have been flats. This oversupply will only put more downward pressure on both rents and capital gains.
And with interest rates likely to rise again before the end of the year, to at least 6%, buy-to-let repossessions will only increase. If you haven’t sold up already, this could be the time to do so.