Why are landlords selling up – and is buy-to-let still worth it?

The last few years have not been kind to buy-to-let landlords. Mortgage interest relief began to be phased out in 2017. Since 2020, you’ve only been able to claim a tax credit based on 20% of your mortgage interest payments. This only pays out at the basic rate of income tax. Just as bad, since 2016 landlords have had to pay a 3% Stamp Duty Land Tax (SDLT) surcharge on any property they buy. From 30 October 2024 this surcharge was increased to 5%. Then there are the upcoming changes outlined in the government’s A fairer private rented sector white paper. These will force landlords to make their properties meet the Decent Homes Standard, will (despite recent delays and procrastination) eventually abolish Section 21 ‘no fault evictions’ and allow rent rises only once per year. Now, with recent rises in interest rates – as landlords reach the end of their fixed rate mortgage periods they are beginning to get clobbered by larger mortgage payments. Given this backdrop, it’s little wonder we’re seeing many landlords selling up. Then there’s the reduction is the CGT exempt allowance which has fallen from £12,000 to £6000 for 2023/24 and now to £3000 for 2024/25.

Are landlords really selling up?

It’s undeniable that landlords have been selling up in growing numbers over the last five years.  In London, 19% of sales – almost a fifth – were made by landlords. By and large, these properties are not being sold to other landlords. We know this because the number of rental properties being advertised is dropping. In October 2022, only 214,938 rental properties were advertised. Only a few years ago,  this number was 339,516.

How will interest rate rises affect landlords?

In December 2021, the average two-year buy-to-let mortgage rate was 2.9%. By the beginning of October 23, this had risen to 6.4%. While rates now appear to be falling a bit, it’s unlikely they are going to fall to the low levels seen just a few years ago.

It’s not difficult to see what impact this will have on landlords. Imagine you are a landlord who buys a property for £350,000. You borrow £250,000 via a 25-year buy-to-let mortgage and you charge £1,500 rent per month. With a 2.9% mortgage, you’ll pay £604 per month in interest.

Now imagine the interest rate has gone up to 6.4%. Your monthly interest payments will now be £1333 – an increase of £729.

Worse, if you tried to get a mortgage at 6.4%, you would fail. At 2.9%, the rent income would be 248% of the interest paid. At 6.4%, it would be 112%. The Prudential Regulation Authority (PRA) requires lenders to make sure rental income is at least 125% of the interest cost. In addition, most lenders set their own benchmarks of 145%.

Should landlords put up rents?

Faced with mortgage interest rises, the logical solution is to raise rent. Indeed, many landlords have been doing just this. Rents are outstripping inflation in many areas of the country and, in 102 council districts, have gone up by at least 10.1%.

However, there’s only so high rents can go. Currently, the cost-of-living crisis is having a crippling effect on many people’s incomes. This may lead to more people sharing homes or becoming lodgers. If this happens, more rental properties will begin to become available, meaning extra competition will cool off rent rises. In addition, if you have existing tenants, imposing a rent rise may well make your property unaffordable for them. This would mean you’d have to go to the trouble and expense of finding new tenants willing to pay the higher rate.

Will things improve for landlords?

While we don’t have a crystal ball that will reveal the future, it’s fair to say that things aren’t looking bright for landlords – especially those with small portfolios.

In addition, UK house prices have just experienced their sharpest fall in two years. Some experts are predicting they will drop further next year. If this happens, it will mean the value of portfolios will drop significantly – potentially pushing up the number of landlords selling up.

Should I set up a limited company?

Many landlords have tried to preserve their margins by setting up limited companies. Indeed, the number of companies set up to hold buy-to-let properties has rocketed. In September 2017, a total 148,874 such companies existed. There are now over 302,000 of them.

It’s not hard to see why. When a limited company owns rental property, it’s possible to claim mortgage relief. However, there are drawbacks. If you transfer existing properties to a limited company, that counts as a sale. As a result, you’d need to pay Capital Gains Tax. In addition, buy-to-let mortgages are more expensive for companies than they are for individuals, although that gap is narrowing.

There’s also a certain amount of uncertainty if you have a limited company.

Should I sell up?

Ultimately, it’s up to you whether you become one of the landlords selling up at the moment. However, our advice would be to get some expert tax planning advice. This will enable to you work out whether it’s worth keeping your portfolio for the long term, and also whether our Landlords’ Platinum Accounting Service can help you manage your portfolio more efficiently and profitably. If you’d like our buy-to-let experts to advise you, please get in touch today to arrange an appointment.