In a recent research report released by the Intermediary Mortgage Lenders Association (IMLA), concerns have been raised regarding the growing challenges faced by private landlords in the Private Rented Sector (PRS). The report sheds light on the increasing regulatory and tax changes that have significantly escalated operating costs for landlords, potentially rendering their business models unviable. If left unaddressed, these issues could not only impact the landlords but also lead to reduced rental property availability and a subsequent rise in rents, ultimately burdening tenants.
Over the years, private landlords have grappled with mounting burdens due to a series of regulatory and tax adjustments. While falling mortgage rates had previously offset these additional costs, the current surge in buy-to-let mortgage rates poses a considerable risk to the financial viability of many private landlords’ businesses. Although a mass exodus from the PRS has not been observed yet, the loss of rental properties would undoubtedly impact supply and, in the long run, cause rental prices to rise, detrimentally affecting tenants.
The report draws attention to various changes that have contributed to increased operating costs for landlords. These changes include the restriction of mortgage interest tax deduction to the basic rate of income in 2015, the exclusion of residential property from the reduction of capital gains tax for other assets in 2016, ambiguity surrounding proposals for enhanced energy efficiency standards, provisions in The Renters (Reform) Bill currently before Parliament, and calls for a temporary rent freeze and eviction ban from certain quarters. The report emphasizes that the heightened regulatory burden will ultimately result in higher costs for tenants.
IMLA’s report reveals a significant increase in the cost of servicing buy-to-let mortgages. According to data from Octane Capital, landlords seeking new mortgage deals have witnessed an average rise of 75.7% in their monthly interest payments over the past year. While the majority of landlords are currently benefiting from low fixed-rate loans, their interest rate payments will inevitably rise in the coming months as their current fixed deals expire. Consequently, rents will face additional upward pressure, exacerbating the existing mismatch with inflation.
In the period leading up to April, existing private rents, as measured by the Office for National Statistics (ONS), saw a 4.8% increase, while newly agreed rents, as measured by Homelet, surged by 9.9%. Despite these increases, they still fell below the 8.7% consumer price inflation witnessed in April.
From 2013 to mid-2022, estimated net yields for landlords outperformed buy-to-let mortgage rates, enabling positive gearing and increasing returns on property equity through increased debt. This favorable economic environment encouraged further investment. However, the current scenario reveals that two-year fixed-rate mortgage rates exceed average net yields, resulting in negative gearing.
IMLA warns that the sudden rise in funding costs is leading to a significant number of buy-to-let landlords failing affordability assessments while attempting to refinance loans. Some landlords may contemplate exiting the market altogether, while others might be forced to sell properties and restructure their debt portfolios.
Kate Davies, the executive director at IMLA, emphasizes the importance of maintaining the health of the PRS, which currently serves approximately 4.6 million households (equivalent to 11 million people) and represents around 19% of the housing market. Davies stresses the need for policymakers to address the challenging environment faced by landlords and consider the potential consequences for the PRS and tenants if immediate action is not taken.
While tenant protections are crucial, the focus must now shift toward stimulating increased investment in the sector and providing support to landlords facing escalating operating costs. Striking the right balance is paramount to avoid the undesirable outcome of higher rents and reduced property availability, which would adversely affect both tenants