0:10 AM, 16th June 2023, About 2 years ago 26
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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?
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To compound matters, some lenders have withdrawn hundreds of deals from the market – and when they are repriced the lending criteria is much tighter.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.
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.
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.
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).
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.
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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Citizens Advice calls for a two-year ban on tenant evictions
Neil P
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Sign Up14:20 PM, 16th June 2023, About 2 years ago
I first invested in 1993 and remember well the high rates pre-2008, but thought the new base level would be 3%-ish rate. The prospect of 6% is just scary and way exceeds my previous stress-testing model.
So I've doubled down...I've used my cash savings to buy high-yielding properties with no mortgages, thereby offsetting my increased interest payments with more rent. I'm still massively down (though still profitable thankfully), but I'm not selling - I still can't see a better pension plan than the portfolio I have now.
northern landlord
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Sign Up14:43 PM, 16th June 2023, About 2 years ago
Look at two of today’s headlines ”Citizens Advice calls for a two-year ban on tenant evictions” and “Call to support struggling landlords to remain in the PRS”. No prizes for predicting what call stands the best chance of succeeding. In fact, the CAB already have at least half if not more of their wish in place already given that Councils illegally tell tenants to stay put until ordered out by a court which can take a year and then you have to wait some months more for bailiffs. As for the help for landlords to stay in the PRS this will be the same as the help they didn’t get during the pandemic when tenants went into arrears.
All our PRS properties are paid for now so interest rates don’t affect us directly which we are thankful for. Like a lot of landlords we had planned to get out of the PRS at some point thinking it would be relatively easy to evict tenants when the time came (legally if not morally) while Section 21 was a mandatory safety net. This net is going to be removed and despite what anybody says it is going to be more difficult to evict tenants for anti-social behaviour and selling up is going to get a lot stickier in future. Add to this landlord registration schemes, decent home inspections and ombudsman schemes all to be paid for and the potential large bills to comply with the proposed EPC regulations all backed up by up to £30,000 fines and rent repayment orders if you slip up. Then take into account that CGT allowances will probably fall to nothing in the next few years and then what if labour gets in? The Tories have stolen most of Labour’s thunder with the Renters Reform Bill so about the only thing left for Labour are rent controls of some form or another. If you are getting on a bit and always planned to get out of the PRS when you got old now is a good time. Alternatively if you do plan to carry on and have a property portfolio rationalise it by selling off all the old E-D rated property you have.
GlanACC
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Sign Up14:59 PM, 16th June 2023, About 2 years ago
It was certain that interest rates couldn't stay at 2% or less for ever so landlords should have factored in a higher rate when borrowing. I did, and with rates now approaching 8% I would also have been caught out. Happily as I was getting out of BTL anyway I sold most of my properties and used the money to clear the mortgages on the rest. Can't see BTL surviving these high interest rates unless you are a cash buyer or have a very low LTV
Ben White
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Sign Up15:27 PM, 16th June 2023, About 2 years ago
Reply to the comment left by Neil P at 16/06/2023 - 14:20
I have been doing the same but with a mix of investment types as we want to reduce our workload as well. The problem is the amount of lending means we cant keep up with the BR increases. We sold some of the worst properties with highest rates to reduce exposure but if they keep rising we are just delaying the inevitable. We fixed a few on new products but nearly all are trackers, we had it good during covid now we are at break even. If we can sell more even at the current low prices we can get through it just by using the funds to cover costs till we all come out the other side poorer.
LL Minion
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Sign Up16:04 PM, 16th June 2023, About 2 years ago
even putting the financial concerns aside, the baseline tells me the sector is proving to be more aggro than its worth. No one minds putting the work in, but its no fun when everyone needs what you provide, yet at the same time wants to screw you over at every opportunity just because they can. It normally comes about through jealousy. The government are looking for a scapegoat to the housing crisis and we have what they don't. Accommodation.
So turn the screws government, local councils, Shelter et al and sit back feeling smug....then watch the whole thing implode.
Even if overnight every private landlord has to hand over their property to the current tenant, there are still millions without a home. Then what?
It gets tiresome and demoralising and there comes a point where you just say no more.
Dennis Forrest
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Sign Up16:24 PM, 16th June 2023, About 2 years ago
Reply to the comment left by Churchills Tax Advisers at 16/06/2023 - 11:33
If the government really wanted to reduce the number of landlords exiting the PRS they could do it at a stroke by repealing/abolishing Section 24. Especially with the reduction in CGT relief this year to £6000 reducing to £3000 next year might be enough to make some landlords reconsider selling up. If they also take an optimistic view of future interest rates they might be tempted by a tracker. e.g. Leeds do a 2 year 60% BTL at 0.55% above base rate. Might even persuade some landlords to mop up some of those properties being sold.
Churchills Tax Advisers
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Sign Up16:33 PM, 16th June 2023, About 2 years ago
If the government wanted to reduce the number of landlords exiting the PRS it could:
- reduce interest rates
- give full tax relief for finance costs
- cut out a lot of the licencing, which is just a licence for authorities to print money
- knock the energy rating fiasco on the head
- continue to allow landlords to choose whether to allow tenants with pets and tenants on benefits
- speed up the process under which their property can be recovered from defaulting tenants
- accept that property letting is a trade for tax purposes
- put property rental businesses on the same tax footing as other businesses,
Dennis Forrest
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Sign Up16:39 PM, 16th June 2023, About 2 years ago
Reply to the comment left by Churchills Tax Advisers at 16/06/2023 - 16:33
You won't get all that at once. IMO Section 24 is the priority.
GlanACC
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Sign Up16:45 PM, 16th June 2023, About 2 years ago
Reply to the comment left by Dennis Forrest at 16/06/2023 - 16:39When (note: not if) Labour get in you wont't get any of it, but you will get a whole lot more - Rent caps for a start
Churchills Tax Advisers
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Sign Up16:57 PM, 16th June 2023, About 2 years ago
Reply to the comment left by Dennis Forrest at 16/06/2023 - 16:39I would say that limited tax relief for finance costs and unwillingness to treat BTL business as a trade for tax purposes affects more landlords on a day to day basis.