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The typical landlord has seen their annual profits halve since the start of the year due to higher mortgage rates, according to new research.

Interest rate hikes are eroding how much profit the average landlord is able to make, according to numbers crunched by estate agent Hamptons.

Following the base rate hike to 1.75 per cent last week, it also said that if the base rate was to reach 2.5 per cent, the average UK landlord could see their profits turn negative. 

With many buy-to-let landlords using an interest-only mortgage to help generate greater cashflow, rising rates can be devastating for their profit margins.

Two-year fixed rate buy-to-let mortgages at 60 per cent loan-to-value have on average risen from 1.25 per cent to 3.12 per cent since October last year, according to analysis of rates at the top 10 lenders by mortgage broker, L&C Mortgages.

On a £200,000 interest-only mortgage, a landlord would have typically paid £209 a month in October. Today they will typically pay £521 a month. That works out as £3,744 extra a year.

For landlords with a mortgage covering 75 per cent of their property's value, there is a similar picture. Average rates offered by the 10 biggest lenders have risen from 1.49 per cent to 3.21 per cent since October.

On a £200,000 interest-only mortgage that's the difference between paying £248 a month and £535 a month, which works out as £3,444 extra each year.  

Nathan Emerson, chief executive of estate agent body Propertymark said: 'Over the past six months, we’ve seen significant shifts in trends that professionals in the sector had been accustomed to.

'Mortgages including buy-to-let, which are on short term, fixed contracts, have been at historically low interest rate levels for years but are now rising sharply. 

'Property owners seeing increases to their monthly repayments are having to raise rents. 

'This is leaving many renters in difficulty due to affordability at a time where other costs are also rising.'

Similar to homeowners, most buy-to-let investors with mortgages are on two or five-year fixed-rate deals - meaning the impact of rising rates won't be felt immediately by everyone. 

However, many landlords remortgaging over the coming months could face higher payments. 

Tax hikes also hitting landlord profits 

Landlords have also been hit with tax changes over the past few years which mean they can no longer fully offset mortgage costs against tax.

Landlords who own buy-to-let properties in their own name could previously deduct mortgage expenses from their rental income before tax, reducing their overall bill.

This meant a landlord with mortgage interest payments of £400 a month on a property rented out for £1,000 a month would only pay tax on £600 of that income.

However, this started to be phased out in 2017 before being stopped completely in April 2020.

Now landlords receive a tax credit instead, based on 20 per cent of their mortgage interest payments.

This means a higher rate tax paying landlord with mortgage interest payments of £400 a month, again on a property rented out for £1,000 a month, now pays tax on the full £1,000 – but with a 20 per cent rate cut on the £400 that is being used towards the mortgage.

This is much less generous for higher-rate taxpayers, who previously received a 40 per cent tax relief on mortgage payments.

Simon Jones, chief executive at financial comparison site Investing Reviews, said: 'Buy-to-let landlords are facing a double whammy of rising borrowing costs and increased taxes.

'Typically buy-to-let investors will have taken out 75 per cent loan-to-value interest-only mortgages at around 2 per cent, but those coming to the end of their deal are now facing rates of 4 per cent.

'Thanks to George Osborne, mortgage interest relief is no longer available to landlords who bought investment properties in their own personal name.

'Those landlords who are higher rate taxpayers are quickly seeing their cash-flow vanish.'

Will there be further mortgage rate rises?

On Thursday, the Bank of England increased its base rate by 0.5 percentage points to 1.75 per cent in its bid to bring inflation to heel.

However, according to the Bank of England, it expects Consumer Price Index (CPI) inflation to hit 13 per cent over the next few months. 

Meanwhile, think tank the National Institute of Economic and Social Research has warned that the Retail Price Index, a separate measure of inflation, could hit 17.7 per cent by the end of the year.

All this means that we will likely see further base rate hikes from the Bank of England over the coming months, which may contribute to mortgage rates also rising.

David Hollingworth, associate director at broker L&C Mortgages said: 'Buy-to-Let rates aren't immune to the pressures that have been bumping up the rates in the mainstream market.

'The increase in the base rate and the market's expectation that there could be more to come has seen lenders finding costs rise and ultimately that will be reflected in product pricing.

'Lenders also have to manage their volume flow and once lenders begin to shift rates there can be something of a snowball effect as lenders look to protect their service by moving away from the best buys.'

Hollingworth believes that the 0.5 percentage point base rate rise has already been priced into current mortgage rates so may not result in a flurry of hikes, although he is expecting rates to continue moving upwards.

He added: 'I think with further base rate rises being predicted for the future, the most likely outcome looks as though the trend of rising rates may continue in the near term.'

The other concern is whether those coming to the end of their current mortgage deals will be able to remortgage to a new deal.

This is because lenders judge buy-to-let mortgage affordability based on a rental stress test which determines how much landlords can borrow.

Mortgage lenders require the landlord to demonstrate that their rental income would cover between 125 to 145 per cent of their mortgage payments, based on a hypothetical interest rate of 5.5 per cent.

Whether a borrower will be stress tested at 125 per cent or 145 per cent largely depends on a their income tax band and how long they wish to fix for.

Ray Boulger, senior mortgage technical manager at mortgage broker John Charcol, said: 'For many much higher mortgage costs will be the final straw and they will either choose to sell or become forced sellers.

'Unless rents were massively increased, large mortgages supported solely by rental income would cease to be available as lenders require rental cover of between 125 per cent and 145 per cent.

'Landlords won't be able to significantly increase rents just because their mortgage costs have shot up.'

Typical landlord 'would make loss' if mortgages hit 4%  

Hamptons' data shows that the average landlord could see their buy-to-let investment become loss-making if mortgage rates continue to rise.

The calculations are based on a typical landlord owning a property worth £222,000, generating £13,098 a year in rent,  with an interest-only mortgage covering 75 per cent of a property's value.

Hamptons has estimated that if the base rate reached 2.5 per cent, the average UK landlord would see their profits turn negative.

With the base rate having risen to 1.75 per cent, the average higher-rate taxpayer is now likely to see their profit fall by 41 per cent, according to the analysis.

As of June last year, a typical higher rate taxpaying landlord could make a net profit pf £2,786, but with the base rate rising to 1.75 per cent, that net profit would fall to £956.

Hamptons estimates that once typical buy-to-let mortgage rates hit 4 per cent, the average landlord will begin making a net loss each year.

Based on Hamptons calculations, a 4.07 per cent mortgage rate would result in a £53 net loss, whilst a 5.07 per cent mortgage rate would result in a £1,398 net loss.

Aneisha Beveridge, head of research at Hamptons, said: 'It's likely that investors will start to adjust before profitability is wiped out completely through a mixture of incorporation and paying down debt - either from savings or selling off parts of a portfolio.

'However, what the analysis does show is that rates don't have to go up much to impact profit.

'So for heavily leveraged landlords, this should serve as a bit of a wake-up call.

'And if investors aren't able to pass on rising costs to tenants in the form of higher rents, some are likely to exit the market if they can't weather the storm.

'It goes without saying that the lowest yielding landlords will be hardest hit by any interest rate rises.

'This is likely to impact investors in London, the lowest yielding region in the UK, in particular. However, at least many of these investors have accumulated a buffer from strong capital growth.'

Vanessa Warwick, a private landlord and co-founder of the property forum, Property Tribes, believes that accidental and smaller-time landlords will likely be forced to sell up if rates continue to rise.

'Experienced landlords will have likely fixed their mortgages for five, seven or even 10 years,' she said. 

'It's really only landlords who are on standard variable rates and on fixed rates coming to an end of their current deal that will suffer.

'We've had historic low interest rates for over a decade and I think landlords have been very fortunate on that front.

'If they haven't built up their reserves, and planned accordingly, then, like with any business they will suffer the consequences.'

What does it mean for the rental sector?

The private rental market already has a chronic undersupply of homes that has in part been caused by small-scale investors and accidental landlords selling up in recent years.

Hamptons' data suggests that since 2016, almost a quarter of a million more homes have been sold by landlords than have been purchased.

Propertymark has also revealed that four in five estate agents say the number of landlords leaving has increased over the past three years.

These landlords are in some cases being squeezed out of the market by increased taxation and regulatory pressures, and now rising mortgage rates could add an additional burden.

At the same time, the number of renters seeking homes appears to be increasing. 

The number of new tenants registering per estate agent branch continues to rise year-on-year, according to analysis by Propertymark, the leading membership body for property agents.

On average 68 tenants registered per month in the first half of 2019. This rose to 85 in 2021, and now sits at an average of 98 registering per office each month in 2022.

The undersupply of rental homes is resulting in greater competition for the homes that remain, which translates into higher asking rents.

The average rental price for a new tenancy in the UK is now £1,127 per month, according to the HomeLet Rental index, up by 9.5 per cent from the same time last year.

More than three quarters of letting agents reported month-on-month rent increases across the first half of this, year compared to just over a third of agents reporting rent rises in 2019, according to Propertymark.

Vanessa Warwick adds: 'A lot of landlords are already exiting because of the increased regulation and legislation.

'So with interest rates rising, this is going to cause further fall in landlord numbers, forcing rents to continue rising putting more pressure on renters.

'I put a one bedroom flat up for rent in London about six weeks ago, and I had 107 applicants in 48 hours.

'I had 17 viewings and every single person turned up, which is virtually unheard of. And I had five offers and the final offer was £100 over the asking price.'

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