Higher yields from outside the capital will cushion landlords from potential losses
As rising interest rates erode the profitability of buy-to-let for mortgaged landlords, investors are increasingly buying properties in higher yielding parts of the country – driving them further away from London, according to residential estate agent Hamptons.
The latest Hamptons Monthly Lettings Index showed that so far this year, a record 73% of new buy-to-let purchases had earned gross yields above 5%, up from 63% in 2016 when the buy-to-let tax system began to change. Around 23% of new investors earned gross yields of 8% or above, up from 20% in 2015.
London offers the weakest returns of any region in England and Wales with an average gross yield of 4.9%. Hamptons said this is one of the main reasons why London-based investors are increasingly purchasing buy-to-lets beyond the capital, targeting higher yielding areas.
So far this year, a record two-thirds (66%) of London-based investors have chosen to purchase a buy-to-let property outside the capital, up from just 26% a decade ago.
A fifth (20%) of London investors bought properties in the North of England, up from 9% in 2016 and just 1% a decade ago. Here, gross yields sit at 7.4%, outpacing the 6.1% average across England and Wales, Hamptons noted. London landlords buying outside the capital bought 105.7 miles away on average – 20.9 miles, or 25%, further than in 2016.
Today, 29% of all properties in England and Wales bought as a buy-to-let are located in the North West, North East, or Yorkshire & Humber, triple the share a decade ago.
Read more: Buy-to-let has lost its appeal – UK investors.
Hamptons also revealed that for the 50% of landlords who use a mortgage to fund a buy-to-let purchase, rising interest rates mean that many will face higher outgoings when they come to remortgage.
Since August 2021, the average mortgage rate on a typical 75% loan-to-value (LTV) buy-to-let has risen from 1.79% to 3.51% last month. This means the average landlord who bought a £222,000 buy-to-let last year will likely see their annual interest-only mortgage payments nearly double from £3,010 to £5,903 if they remortgaged last month. If last week’s 0.50% base rate rise to 2.25% is fully passed on, this will increase payments to £6,743 for an investor remortgaging this month.
As a result, the net annual profit made by a higher-rate taxpaying investor who earns an average yield of 6.1% could fall from £3,198 in August 2021 to £212 with the new base rate, down 93% due to higher rates when re-mortgaging.
If the base rate reaches 2.5%, the average higher-rate taxpaying investor with a typical 75% LTV mortgage is likely to start making a loss. Hamptons said they will need to yield around 7% or more to stay out of the red – a figure only achievable on average in 23% of local authorities in England and Wales, 65% of which are in the North of England.
Hamptons added that lower-rate taxpayers, or limited company landlords, have much more wiggle room. While the average lower-rate taxpaying investor achieving the average yield (6.1%) in England and Wales will have also seen their profit shrink over the last year (from £5,070 to £2,750) when remortgaging, the base rate would have to reach 4.0% before they start making a loss. Every local authority in the country offers an average gross yield above this mark.
“Over the last few years, investors have needed to seek higher-yielding properties in order to make the sums stack up,” Aneisha Beveridge, head of research at Hamptons, said. “This is because taxation changes, which removed the ability for landlords to offset mortgage interest from their tax bill, have compelled investors to maximise their rental income in order to cover their costs.
“This is a trend that has become more embedded in 2022 as rising mortgage rates eat further into profits and, in some cases, push those profits into the red. If Section 24 changes were reversed, meaning landlords could fully offset their mortgage interest, the average higher-rate landlord would turn a profit of £2,065 each year instead of £884. It also means they could weather a base rate of up to 4.0% before their profit turned negative, instead of 2.5% under the current rules.”
Beveridge added that while around half of landlords who own their buy-to-lets outright won’t be under the same pressure from rising rates, those looking to purchase a new investment property with a mortgage are increasingly running out of options.
“If the yield doesn’t meet a lenders’ rent-cover requirements, they’ll have to put down a bigger deposit,” she said. “This is going to make investing in Southern areas, where yields are lower, tricky for landlords who are heavily reliant on mortgage finance, restricting buy-to-let to those with the deepest pockets. In turn, this will put further pressure on already low stock levels.”
The Hamptons report also showed a cooling down of rental growth since hitting a record high of 11.5% in May. At an average of £1,165 per calendar month, the cost of a newly let home in Great Britain rose 7.4% year-on-year in August.
Rental growth slowed in every region of the country, apart from the South East, South West, and Wales where rents rose at the same pace as last month.
London continues to see the strongest growth, as rents rose 11.3% year-on-year in August in the capital. This has been bolstered by a 29.9% annual rise in Inner London, where rental growth has been running above 10% for the last eight months. Hamptons, however, noted that this strong growth continues to reflect the weaker market last year.
The Hamptons Lettings Index, which is based on achieved rather than advertised rents, uses data from the Countrywide Group to track changes to the cost of renting of the 90,000 homes let and managed by Countrywide each year, adjusting for their location and type.