Buy-to-let yields have hit a record low, fueling fears that property investors will sell up. Landlords could soon turn a loss as higher interest rates bite, while the Government’s buy-to-let tax crackdown further amplifies the pain of soaring mortgage costs.
Nationally, gross rental yields are already at a record low of 4.38pc. This is because house prices have climbed more quickly than rents.
Research consultancy Capital Economics has forecast that by the end of 2022 yields will hit a new low of 4.26pc. As interest rate rises push up landlords’ outgoings, next year the margin between rental income and mortgage costs will become the most squeezed it has been since the financial crisis.
The Bank of England’s decision to increase the Bank Rate to 1.25pc will cause the average net profit on a new buy-to-let property to fall by 15pc for a landlord who pays higher-rate tax, according to Hamptons estate agents.
In London an investor who pays a higher-rate tax will see their net profit fall by £840 a year – 29pc less than before the rate rise.
“It will only take the Bank Rate to reach 2pc before the average landlord on a higher-rate tax would see their profit more than halve,” said Aneisha Beveridge of the Hamptons.
Capital Economics has a forecast that the Bank Rate will hit 3pc next year, but a typical buy-to-let will be loss-making much sooner.
An average landlord on the higher rate of tax will see their investment turn a loss if the Bank Rate hits 2.75pc. At this point, a typical buy-to-let mortgage rate would be 4.11pc, meaning they would lose £97 per property per year. At 3pc, their annual losses would jump to £403.
London landlords will be hit hardest, said Ms Beveridge. “Here, profits would fall by 59pc if the Bank Rate rose to 1.5pc,” she said. If interest rates rise to 2pc, a typical London landlord will lose £501 a year per property. At 3pc, the yearly loss would be £2,180.