The Decline of Buy-to-Let Returns: Navigating the Mortgage Rate Surge

The buy-to-let (BTL) market, once a lucrative venture for investors, is currently facing a significant downturn. With mortgage rates on the rise, the returns on BTL investments have seen a sharp decline, impacting landlords and reshaping the property investment landscape.

A Drastic Drop in Returns

Recent data paints a concerning picture for BTL investors. On average, they stand to earn £4,317 less from their BTL properties this year compared to 2022. This decline is attributed to the escalating mortgage rates that are eating into their potential income.

Research from the personal finance comparison platform, Finder.com, provides a clearer perspective. A landlord who opted for a two-year fixed-rate BTL mortgage in June 2023 is projected to see returns amounting to just £2,995 annually. In contrast, a landlord who secured the same mortgage deal in June 2022 would have enjoyed an average monthly income of £609, translating to £7,312 annually.

This stark difference underscores a worrying trend: in a span of just one year, potential returns from BTL properties for new investors have plummeted by a staggering 59%. This equates to a loss of £4,317 in potential yearly income.

The Rising Tide of Borrowing Costs

The primary culprit behind this downturn is the escalating cost of borrowing. Mortgage rates, affecting both residential and BTL borrowers, have been on an upward trajectory. By July 2023, BTL interest rates had soared to an average of 6.18%.

This surge in borrowing costs has had a ripple effect on the BTL market. In the initial quarter of 2023, the UK’s BTL mortgage lending value plummeted by 40%, dropping to £5.8bn from the £9.7bn recorded in the preceding quarter. Year-on-year comparisons further highlight the decline, with a 44% drop compared to the same period in 2022, when BTL mortgage lending stood at £10.3bn.

Furthermore, BTL loans, as a proportion of total mortgage lending, accounted for a mere 9.8% in Q1 2023. This is the lowest percentage since 2011, indicating a reduced interest in BTL property investments.

The Market’s Response and Expert Insights

Kate Steere, Deputy Editor and housing specialist at Finder.com, sheds light on the current scenario. She points out a growing trend of landlords exiting the BTL market due to diminishing profitability. Steere notes, “Even with house prices beginning to decline and 40% of experts anticipating a potential housing market crash, landlords transitioning from a fixed rate will undoubtedly be deterred by the soaring mortgage rates, which have crossed the 6% mark, a stark contrast to the sub-2% rates seen just two years prior.”

The Exodus of Landlords

Supporting this trend, a report from estate agency Savills reveals that between April and May, approximately 25,000 UK homes were sold by landlords. This is a notable increase from the 22,000 homes sold in the two months prior.

The ONS House Price Index for June 2023 pegged the average UK house price at £288,000, with the average BTL mortgage rate at 5.45%. Finder.com’s research, which analyzed monthly average BTL mortgage rates, house prices, and rent prices in the UK, concluded that the current environment is less favorable for those entering new mortgage agreements.

Conclusion

The BTL market, once a beacon for investors seeking steady returns, is navigating turbulent waters. With rising mortgage rates and declining profitability, the landscape is shifting, prompting many landlords to reconsider their positions. As the market continues to evolve, potential investors and current landlords alike must stay informed and adapt their strategies accordingly.

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