Buy-to-let mortgages – what's happening in the market?

Brokers discuss the latest developments in the space

Buy-to-let mortgages – what's happening in the market?

In an eye-catching statistic released in October, Simply Business found that a quarter of landlords are planning to sell up in the next 12 months thanks to rising rates (cited by 43% of those planning to sell) and new regulation, such as the Renters Reform Bill (cited by 49% of those planning to sell).  

With tax increases adding another burden, an exodus of landlords from the market could heap further pressure on already limited supply and push rents up further. So what have been the repercussions for brokers who specialise in the buy-to-let mortgages space?

How is the buy-to-let market performing?

Justin Moy (pictured left), managing director at EHF Mortgages, said experienced landlords, deeply entrenched in the market, will persist with their business plans despite short-term spikes in rates, relying on higher rents and strategic cash reserves.

“However, for newcomers to the landlord realm, the perceived benefits of property investment have dwindled, and razor-thin margins offer little financial incentive for letting,” he said.

The current scenario, Moy said, has eroded the attractiveness of property investment, leaving little room for financial upside.

A potential remedy, he believes, lies in a government policy shift towards allowing full interest cost offsetting against profits.

This change, Moy added, could inject a significant boost into landlords’ profitability.

“It is perplexing that the government, heavily dependent on the private rented market for its housing strategy, simultaneously imposes financial penalties on these crucial contributors,” he said.

Striking a balance between fostering a thriving private rented sector and implementing policies that support landlords financially, Moy said, is pivotal for a sustainable housing ecosystem.

“The government’s acknowledgment of the symbiotic relationship with private landlords could lead to a more harmonious approach that ensures the continued participation of these stakeholders in meeting housing needs,” he said.

What trends are the current trends in the BTL space?

Scott Taylor-Barr (pictured right), financial adviser at Barnsdale Financial Management, said buy-to-let investments are undergoing a substantial downturn, both from existing landlord clients and prospective ones.

The beginning of this downturn can be traced back to the former Chancellor of the Exchequer George Osborne and his 2016 announcement, which introduced changes in what landlords can offset against rental income and imposed second property stamp duty.

Instead of being able to offset all mortgage interest payments against rental income when calculating their tax bill, landlords receive a tax credit that is worth 20% of their mortgage interest payments. These measures, he suggested, have significantly heightened the cost of owning a buy-to-let property, making it more difficult to achieve satisfactory returns.

“The diminished appeal of buy-to-let investments is underscored by the dwindling returns relative to the substantial initial and ongoing costs,” Taylor-Barr added.

Increased rates, he said, further compound the unattractiveness for potential investors, dissuading them from entering the market. Meanwhile, existing property owners, instead of expanding their portfolios, Taylor-Barr said, are opting to maintain their current holdings.

“Notably, the dwindling pool of active investors has shifted towards purchasing through limited companies, a strategic move that navigates the stress tests imposed by mortgage lenders, mitigates potential tax liabilities, and streamlines the inheritance process for their children, providing a silver lining amid the challenging landscape,” he said.

This transformation in investment strategies, Taylor-Barr added, reflects a pragmatic response to the evolving economic environment, as investors adapt to maximise benefits.

How do you believe the buy-to-let market is performing at present and do you think it is still worth it for investors? Let us know in the comment section below.