Landlord Crusader: In the end, it was the Bank of England that broke the PRS

As hardworking and worried landlords, we all know the buy-to-let market is facing a potential catastrophe of rising interest rates, tightening lending criteria and falling house prices.

That inevitably means many of us may find ourselves struggling to keep up with mortgage payments, or worse, unable to remortgage at all.

And all of this is without the potentially fatal impact of the Renters’ Reform Bill and the possibly ruinous cost of the proposed EPC regulations – and there’s still no deadline in sight for that.

So, I’m left thinking: is it time to sell up and get out of the market before it’s too late?

Raised the base rate 12 consecutive times

The Bank of England has raised the base rate 12 consecutive times to reach 4.5% in a bid to tackle inflation. I’m not entirely convinced that the higher rates will deal with ‘inflationary pressures’.

And ‘experts’ are predicting that rates will reach 6% by the end of the year. 6%!

The impact on mortgage costs with rising bank rates has been severe, especially for buy-to-let landlords who typically pay higher interest rates than owner-occupiers.

According to Hargreaves Lansdown, the average two-year fixed BTL mortgage is now over 5.8% (and the i newspaper reports that the average five-year BTL fix is now 6.09% – higher than the 5.55% offered to residential owners).

To compound matters, some lenders have withdrawn hundreds of deals from the market – and when they are repriced the lending criteria is much tighter. Apparently, lenders are stress testing landlords at 8% – or more.

Rising costs are denting many landlords’ profitability and cash flow

It’s all very worrying since these rising costs are denting many landlords’ profitability and cash flow, especially those who have high loan-to-value ratios or interest-only mortgages.

And this is even before we look at the uncertainty and volatility in the housing market, which has seen prices fall by 3.4% over the past year, the Nationwide says – the biggest drop since July 2009.

Sadly, there will be landlords who bought at the peak of the market who may find themselves in negative equity, owing more than their properties are worth.

Sell up now and cash in on their capital gains

So, what should landlords do in this challenging environment? Should we sell up now and cash in on the capital gains, or hold on and hope for a recovery in the market? (I’m genuinely interested in what other landlords have to say!).

The answer comes down to personal circumstances, investment goals, risk appetite, portfolio size and diversity.

Some landlords may decide that now is a good time to exit the market and realise their profits, especially if they have built up substantial equity in their properties over the years. Be prepared for that big CGT bill! (If you haven’t incorporated already).

And, let’s face it, they may also want to avoid the hassle and stress of managing rental properties in a more heavily regulated sector.

Selling now could also help them avoid paying higher capital gains tax rates in the future, as the government may increase them to fund its spending plans.

Selling now may not be an option

However, selling now may not be an option for some landlords, especially those who are in negative equity or have low equity levels.

They may have to wait for prices to recover or find alternative ways to boost their income or reduce their costs.

For example, they could increase their rents (if the market allows), switch to a cheaper mortgage deal (if they can), extend their mortgage term (if possible), or cut down on maintenance and management fees (if feasible).

Stay in the market and ride out the storm

Other landlords may choose to stay in the market and ride out the storm, believing that property is still a good long-term investment that can provide a steady income and capital growth.

They may also see an opportunity to expand their portfolio by buying more properties at lower prices, taking advantage of the reduced competition and increased supply in the market.

However, they will need to have sufficient cash reserves, strong cash flow and robust risk management strategies to cope with the higher costs and lower returns. And they will need nerves of steel should house prices properly tank and interest rates continue rising.

Buy-to-let market is facing a real threat

The buy-to-let market is facing a real threat from rising interest rates and falling house prices, but I don’t think it is doomed.

Landlords who adapt to the changing conditions and plan ahead may still be able to survive and thrive in this challenging sector. The alternative is that lots of landlords will decide that ‘enough-is-enough’ and go sooner rather than later.

And, after years of fending off unwarranted attacks on the PRS from the media and tenant activist groups, I’m left in a quandary.

Because I never thought for a moment that it would be the Bank of England pursuing an ambition to keep inflation at 2% that would see me leave. Not Shelter, not Generation Rent, not the Renters’ Reform Bill, not EPC regulations and not over-entitled tenants who make a landlord’s life hell.

It was the Bank of England. Who’d have thought that?

Until next time,

The Landlord Crusader

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