Last year brought mixed fortunes for landlords. Rising house prices and unrelenting rental demand were countered by soaring mortgage rates, and an expectation that property values will now fall.
Typical UK property prices increased by 12.6 per cent in the year to October, up from a 9.9 per cent rise seen in the 12 months to September, the latest ONS figures show.
The average UK house price was £296,000 in October, which is £33,000 higher than the same time last year – though other indexes show this may have started to fall since.
Buy-to-let investors have endured increasing taxation and regulation in recent years, but nothing will have prepared many of them for the sheer change in mortgage rates.
Meanwhile, demand for private rented housing is 46 per cent above average, according to Zoopla, whilst the supply of such homes is down 38 per cent.
This has caused average rents to rise by 11.1 per cent over the past year to £1,175, according to HomeLet’s rental index.
However, for many landlords with mortgages any extra rental gains have been decimated by rising mortgage rates over the past 12 months.
>> See the latest buy-to-let mortgage rates here
Rob Dix, co-founder of the property forum, Property Hub said: ‘Last year was the ultimate year of two halves.
‘In the first half, the post-pandemic boom was still in full swing. Some 85 per cent of estate agents were selling most of their properties at or above asking price, which is an extremely high proportion by historical standards.
‘Then from the summer onwards, the heat started to come out of the market – and in September, the chaos following the mini-Budget and its affect on mortgages brought the market to a near-standstill.’
We look at what landlords can expect this year.
What’s in store for landlords in 2023?
Squeezed margins
Buy-to-let investors have endured increasing taxation and regulation in recent years, but nothing will have prepared many of them for the huge change in mortgage rates over the past 12 months.
With many buy-to-let landlords using interest-only mortgages to help generate greater cashflow, rising rates can be devastating for their profit margins.
Landlords nearing the end of fixed mortgage deals will be preparing for their monthly costs to soar – and in some cases they will more than treble.
Compared to this time last year, average two year fixed buy-to-let mortgage deals are up by 3.39 percentage points compared to this time last year, according to Moneyfacts, from 2.9 per cent to 6.29 per cent.
On a £200,000 interest only mortgage, that’s the difference between paying £484 a month and £1,048 a month. It adds up to an extra £6,768 over the course of a year.
Interest rates have risen dramatically this year squeezing landlords ‘profit margins
It’s a similar picture for those looking to fix for five years as well.
The typical rate has risen by 3.08 percentage points from 3.18 per cent to 6.26 per cent over the past five years.
The added mortgage costs will come as an additional blow to landlords, who 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.
| Tax year | Annual rental income | Annual mortgage interest | Rental income that is taxed | Tax on rental income | Mortgage interest relief | Net profit after tax |
|---|---|---|---|---|---|---|
| 2016/17 | £12,000 | £4,800 | £7,200 | £2,880 | £0 | £4,320 |
| 2017/2018 | £12,000 | £4,800 | £8,400 | £3,360 | £240 | £4,080 |
| 2018/2019 | £12,000 | £4,800 | £9,600 | £3,840 | £480 | £3,840 |
| 2019/2020 | £12,000 | £4,800 | £10,800 | £4,320 | £720 | £3,600 |
| 2020-now | £12,000 | £4,800 | £12,000 | 4,800 | £960 | £3,360 |
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.
Earlier this year, estate agents Hamptons estimated that once typical buy-to-let mortgage rates hit 4 per cent, the average higher rate taxpaying landlord will begin making a net loss each year.
Based on Hamptons calculations, a 4.07 per cent mortgage rate would lead to a £53 net loss, a 5.07 per cent mortgage rate would result in a £1,398 net loss and a 5.57 per cent mortgage will result in a £2,071 net loss.
| Base rate | 3% base rate | 3.5% base rate | 4% base rate |
|---|---|---|---|
| Mortgage rate: | 4.57% | 5.07% | 5.57% |
| Rental income: | £13,098 | £13,098 | £13,098 |
| Mortgage costs: | £7,685 | £8,526 | £9,367 |
| Running costs: | £4,060 | £4,060 | £4,060 |
| Mortgage cost relief: | £1,537 | £1,705 | £1,873 |
| Taxable ‘profit’: | £9,038 | £9,038 | £9,038 |
| Higher rate tax bill: | £2,078 | £1,910 | £1,742 |
| Net profit: | -£726 | -£1,398 | -£2,071 |
| Credit: Hamptons |
Mortgage brokers are warning that some landlords may simply find they are unable to remortgage in 2023.
Stuart Cheetham, chief executive at MPowered Mortgages says: ‘Landlords face major challenges in 2023. First and foremost they will struggle to remortgage.
‘Remortgaging to try and get a better rate is simply not possible for many landlords as the rental yield calculation no longer works for most lenders given new higher interest rates, meaning landlords will end up with higher monthly payments as a result.’
Lewis Shaw, owner and mortgage broker at Riverside Mortgages added: ‘Any landlord with a mortgage expiring in the next 12 months, unless it’s been on repayment for the past five years, will find themselves in a very tricky position.
‘Expect a fire sale of buy-to-let properties once landlords realise what awaits them with their next mortgage renewal.’
Mortgage rates may fall
It’s worth pointing out that despite the base rate rising to 3.5 per cent in December 2022, fixed mortgage rates have actually been falling since peaking in October following the ill-fated mini-Budget announced by Liz Truss’s Government.
According to Moneyfacts, the average two-year and five year fixed rate buy-to-let mortgage has fallen from highs of 6.9 per cent and 6.8 per cent in mid October to 6.43 per cent and 6.36 per cent respectively as of late December.
The cheapest fixed rate mortgage deals are now charging below 5 per cent, albeit many come with hefty product fees.
The expectation among some industry experts is for rates to continue to fall.
Rob Dix of Property Hub says: ‘Mortgage rates have fallen substantially over the last six weeks or so, and we believe they’ll fall further.
‘Critically for investors, lenders are also reducing their rental stress tests which have been restricting how much it’s possible to borrow.
‘So we think the mortgage market will continue to improve, but clearly rates anything like we were seeing at the beginning of 2022 aren’t going to happen again for a long time.’
However, other commentators fear that if inflation remains high, the Bank of England will continue to hike the base rate, which could drive mortgage rates higher.
Nathan Emerson, chief executive of estate agenty membership body Propertymark, says: ‘Mortgage rates are set to continue to rise. The bank of England has been very clear that inflation is too high.
‘However, we have seen confidence coming back with more competitive rates re-entering the market.’
Rents will keep on rising
In the face of extra mortgage costs, landlords may feel they have no option but to try and increase rents.
However, most of the upward pressure is being driven by the demand and supply imbalance within the sector.
There has been a 49 per cent decline in homes available to rent in letting agent branches since 2019, according to research by Propertymark.
This chimes with Hamptons’ own data which revealed almost 40 per cent fewer homes available to rent than in 2019.
As a consequence, the average rent in Britain recently soared to more than £1,200 a month for the first time on record, according to Hamptons data.
Going up: The average rent in Britain recently soared to more than £1,200 a month for the first time on record, according to Hamptons’ own data
The rapid growth means the typical rented household is now spending 44 per cent of its post-tax income on rent, the highest share since Hamptons’ records began in 2010.
Despite this, the expectation is that rents will continue to rise this year, albeit at a slower pace.
‘We forecast that rents will remain in positive territory in 2023,’ says Hamptons’ Aneisha Beveridge, ‘which has not been the case in previous downturns.
‘The same factors weighing on house price growth will bolster demand in the rental market.
‘Adding to the upward pressure on rents will be the extra costs facing landlords. But tenants’ squeezed budgets mean that the increase in rents is unlikely to exceed 5 per cent.
‘Rents in the South are likely to rise the most as it’s these areas where low-yielding landlords will be under the most pressure.’
Rental growth on newly-let properties has been surging over the past year
House prices to fall
Whilst rents provide landlords with extra income, it is rising house prices that really drive the investment case for becoming a landlord in the first place.
In June 2022, the average house price was up 13 per cent year-on-year, according to Halifax, having risen 6.4 per cent over the first half of 2022, reaching a peak of £294,845.
However since then, average prices have fallen to £285,579 as of November 2022. There are increasing signs of a market slowdown.
Mortgage approvals for house purchases fell by more than 10 per cent to 59,000 in October 2022, according to the most recent figures from the Bank of England. This was 20 per cent down on the 74,400 mortgage approvals recorded in August.
Falling: The average house price in the UK is now £285,579, down 2.3% from October, according to Halifax
Property portal Zoopla claimed that demand for homes was down by 50 per cent on the year in December. The number of sales being agreed was also down by 28 per cent year-on-year.
It means many sellers are having to accept bigger discounts, with Zoopla finding that an average of 4 per cent taken off initial asking prices last month to achieve a sale.
Most predictions for 2023 have house prices falling anywhere between 5 and 20 per cent, with the Government’s official forecaster the Office for Budget Responsibility predicting a 9 per cent house price fall.
Higher tax bills when selling
Landlords will be hit by a capital gains tax raid from next year that will see the typical property investor lose £2,600 when selling a home that has increased in value.
During the Autumn Statement, the Chancellor Jeremy Hunt announced that the annual exempt amount for capital gains tax will be cut from £12,300 to £6,000 in April, and then halved again to just £3,000 from April 2024.
From April 2024, the average higher-rate taxpaying landlord will pay £2,610 or 12 per cent more in CGT when selling
Landlords making more profit than that when selling properties will be taxed at a rate of 18 per cent, or 28 per cent for higher-rate taxpayers.
CGT is charged on any profit someone makes on an asset that has increased in value, when they come to sell it. This could be when selling a buy-to-let investment or company shares for example.
There are around 2.65million landlords in the UK, according to the latest HMRC figures, and many hold properties which have significantly risen in value during their ownership.
The average landlord who sold this year in England and Wales sold their buy-to-let for £98,050 more than they paid for it, according to research by Hamptons.
| Area | Average Profit after costs | 2022 (£12,300) | 2023 (£6k) | 2023 (£3k) |
| London | £275,787 | £73,780 | £75,540 | £76,380 |
| South East | £114,777 | £28,690 | £30,460 | £31,300 |
| East of England | £97,479 | £23,850 | £25,610 | £26,450 |
| South West | £79,380 | £18,780 | £20,550 | £21,390 |
| West Midlands | £55,008 | £11,960 | £13,720 | £14,560 |
| East Midlands | £51,939 | £11,100 | £12,860 | £13,700 |
| Wales | £48,006 | £10,000 | £11,760 | £12,600 |
| North West | £43,974 | £8,870 | £10,630 | £11,470 |
| Yorkshire & the Humber | £40,779 | £7,970 | £9,740 | £10,580 |
| North East | £20,925 | £2,420 | £4,180 | £5,020 |
| Eng & Wales | £88,245 | £21,260 | £23,030 | £23,870 |
| Source: Hamptons. Note: Assumes landlords make use of CGT allowance and deduct 10% of gains for costs | ||||
After deducting 10 per cent for costs, this would leave the average higher-rate taxpayer landlord with a £21,260 CGT bill.
When the threshold is reduced later this year to £6,000, it will cost the average higher-rate taxpaying landlord an extra £1,770 in tax based on today’s house prices.
From April 2024, the average higher-rate taxpaying landlord will pay £2,610 or 12 per cent more in CGT when selling.
Renters’ Reform Bill
Renters are set to receive new rights to challenge landlords on rent hikes and substandard homes, under plans announced last year as part of the Renters Reform Bill.
The Government labelled the proposals as the biggest shake up of the private rental sector in 30 years’ marking a generational shift that will ‘redress the balance between landlords and the 4.4million tenants living within it.’
The proposals are primarily aimed at clamping down on landlords who provide unfit homes, which the Government estimates to make up roughly one fifth of the sector.
To do this, social housing standards will be extended to private rentals to stop people living in damp, unsafe or cold homes.
A Private Renters’ Ombudsman will be appointed to settle disputes between renters and landlords, and tenants will be able to seek repayment of rent if the standard of their homes is deemed unacceptable.
Perhaps most significantly, the so-called ‘no fault’ Section 21 evictions that allow landlords to terminate tenancies without giving any reason will soon be outlawed.
This will leave landlords relying on section 8 notices in order to evict tenants and means they will soon require a valid reason to evict any tenant.
A valid reason would include if the tenant is in rent arrears, they have caused damage to the property or if they are causing a nuisance to neighbours.
However, tenants can challenge section 8 notices to evict which can result in lengthy waits for landlords as they await a court hearing.
Section 21 enables private landlords to repossess their properties from assured shorthold tenants (ASTs) without having to establish fault on the part of the tenant.
James Wood, policy manager for the National Residential Landlords Association says: ‘Michael Gove has made clear that the Government’s planned Renters’ Reform Bill will be brought before Parliament next year.
‘This will represent the biggest set of changes for the market in over 30 years.
‘Whilst there are many aspects in the proposals to be welcomed, changes still need to be made, especially to ensure effective action can be taken against anti-social behaviour and to ensure that the student housing market functions properly.
‘More broadly, the Government must take action to help, courts handle legitimate repossession cases more swiftly.’
Nathan Emerson, chief executive of Propertymark adds: ‘The abolishment of Section 21 ‘no fault’ evictions is a contentious issue; with many tenants feeling they are unfair but landlords and agents a like dubbing them a ‘safety net’ against bad tenants.
‘The truth is the alternative legal routes to regain possession of a rented property when something goes wrong are just not good enough, and the unhelpful title of ‘no fault’ does little to address the fact that the majority of notices served are indeed for fault.
‘However, the section 8 notice does not effectively tackle anti-social behaviour or damage to properties.’
What about EPC changes?
The EPC is a rating scheme which bands properties between A and G, with an A rating being the most energy efficient and G the least efficient.
At present, all rental properties in England and Wales need to have an EPC of at least E in order to be let, unless they are exempt.
However, in line with its ambition to reach net zero carbon emissions by 2050, the Government is considering upping this requirement to a C rating for all new tenancies from 31 December 2025, and for all existing tenancies from 31 December 2028.
The EPC changes form part of the Minimum Energy Performance of Buildings Bill currently making its way through Parliament.
There are fears that landlords may be required to to upgrade their properties to an EPC of C rating by 2025 in order to let them out
It’s worth noting the bill still has a long way to go before becoming law and could either be amended or rejected, so making a decision to improve a property based on that alone would be premature.
It’s also not inconceivable that the Government might provide extra support and funding were it to become law.
‘When it comes to forthcoming regulation, be it energy efficiency standards or rental reform,’ adds Wood, ‘landlords should wait first to see what the final changes will look like before making investment decisions.
‘Making plans now without understanding what might happen would be premature at this stage.’
>> How energy-saving improvements can take up to 17 years to pay off
Will landlords continue switching to limited companies?
The number of landlords operating as limited companies has doubled since 2017, as they try to cut their tax liabilities and mitigate the cost of rising mortgage rates.
There are now 300,000 buy-to-let property companies in the UK, up from 89,757 in 2017, according to Hamptons.
Those buying properties in a limited company structure are still able to offset their mortgage interest for tax purposes – though they may pay higher mortgage rates due to their company status.
– Find out about the pros and cons of using a limited company
| Year | Number of incorporations |
|---|---|
| 2014 | 10,139 |
| 2015 | 13,224 |
| 2016 | 18,428 |
| 2017 | 23,780 |
| 2018 | 25,716 |
| 2019 | 31,229 |
| 2020 | 40,242 |
| 2021 | 46,919 |
| 2022 | 46,494 |
| Source: Companies House & Hamptons |
‘Given the record number of sales in 2022, we forecast that the 2021 incorporations figure would be a record,’ says Beveridge.
‘While we’ll probably just about be right, 2022 numbers were much higher than we expected.
‘But rather than new purchases, it’s likely that the balance of companies set up in 2022 are existing landlords moving properties they already own in their own name into a company structure.
‘As mortgage rates have jumped up, it’s become much harder for landlords who are higher-rate taxpayers and have a decently-sized mortgage to make any money given they can no longer offset all of the mortgage interest.
‘We expect a similar picture this year too, as landlords’ cheap fixed-term mortgage deals come to an end, and they look to sell up or move homes into a company structure.
Will there be a landlord exodus?
Since 2016, almost a quarter of a million more homes have been sold by landlords than have been purchased, according to Hamptons.
Research by Propertymark has also revealed that four in five estate agents say the number of landlords leaving has increased over the past three years.
It also found that 53 per cent of private rented properties that were sold did not return to the rental market and instead were sold to owner-occupiers.
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.
What happens next? A series of tax changes appear to have stunted the growth of buy-to-let in recent years. But rising mortgage rates could damage the sector ever more
Neela Chauhan, partner at accountancy firm UHY Hacker Young says: ‘We have seen an increasing number of landlords selling off or reducing their portfolios over the past year.
‘Less favourable tax treatment has encouraged this exit from the sector, as well as dissuading newcomers from entering the market.
‘Reducing the number of properties for rent by driving landlords out of the market doesn’t benefit tenants as it adds to the upward momentum on rents.’
Looking ahead, many landlords may be approaching 2023 with trepidation, while some may see it as an opportunity.
There will undoubtedly be some landlords who see reason to sell up in 2023, but the expectation is that the majority of landlords will simply adapt their business models and try to ride out the pain.
| Year | Number of landlord purchases | Number of landlord sales | Net gain/loss |
|---|---|---|---|
| 2013 | 161,682 | 105,924 | 55,758 |
| 2014 | 179,961 | 149,801 | 30,160 |
| 2015 | 192,842 | 177,066 | 15,776 |
| 2016 | 192,864 | 195,505 | -2,641 |
| 2017 | 143,762 | 185,338 | -41,576 |
| 2018 | 127,631 | 180,871 | -53,240 |
| 2019 | 122,086 | 160,263 | -38,177 |
| 2020 | 101,122 | 132,002 | -30,879 |
| 2021 | 172,923 | 201,546 | -28,624 |
| 2022 | 167,500 | 205,000 | -37,500 |
| Source: Hamptons & HMRC |
‘We have not seen an immediate reaction by landlords selling-off,’ says Beveridge.
‘Most landlords are taking a long-term view and are either injecting equity into their mortgaged properties or shuffling their portfolios around.
‘With the expectation that rates will continue falling, some landlords have shifted onto a tracker mortgage to give them a little bit more flexibility.
‘Many, particularly higher-rate taxpayers, have transferred their properties into limited companies to ease the pain – this is a trend we expect to continue in 2023 too.
Slim pickings: Estate agents are warning of a reduced number of rental properties and soaring demand
Rob Dix of Property Hub adds: ‘Using property to make a quick or easy profit has been getting progressively harder ever since 2015, but that’s not necessarily a bad thing.
‘The key is to be realistic about what you can achieve, understand the effort and risk it involves, and approach it as a long-term investment.
‘It’s rare for us to find people who’ve been investing for a decade or more who wish they’d never started – including those who bought around the 2007 peak.’
Some landlords may even be seeing 2023 as a buying opportunity.
The number of landlords registering as potential buyers in estate agent branches is up 9 per cent on last year despite an overall fall in buyer demand, according to Hamptons.
In November 2022, 37 per cent of offers by landlords were on homes without any competing offers, up from just 14 per cent in January.
Landlord resurgence: The share of homes bought by investors is back on the rise once again
Beveridge adds: ‘There are undoubtedly more hurdles for landlords to jump through now when looking to invest in buy-to-let.
‘The shift to a higher interest rate environment will likely limit buy-to-let to investors with the deepest pockets.
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‘For those who need mortgage funding, buy-to-let will be restricted to the highest yielding areas in the country – typically in the Northern regions.
‘That said, the most opportunistic investors tend to snap up properties when the market is weakest.
‘While we’re unlikely to see landlords return to buying at pre-stamp duty surcharge numbers, it’s possible they may outnumber first-time buyers in some months next year, as was common before 2016.’
James Wood of the NRLA adds: ‘There are certain landlords who are likely to be in a stronger position than others.
‘Those able to make cash purchases of properties, or those structured as limited companies are likely to see growing demand for properties as more landlords exit the market due to the impact of growing mortgage interest costs or concerns over forthcoming regulation.
‘Likewise, landlords with long term fixed rate mortgages are more likely to be in a position to weather growing costs.’
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