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Interest Rates Double and Landlords in Panic Mode

Rising interest rates are likely to send many landlords into panic mode, as new research reveals the soaring cost of buy-to-let mortgages.

Online mortgage broker Property Master found that the average rate for buy-to-let mortgages has more than doubled since January, taking the monthly cost of a typical £160,000 mortgage on a two-year fixed rate from £262 at the beginning of 2022 to £494 in August.

Meanwhile, rates on a five-year deal had increased from 1.94% to 3.5% over the same period, taking monthly costs to £481, or an extra £208.

Earlier this month, the Bank of England unveiled the UK’s biggest interest rate rise for 27 years, with the base rate rising again by 0.5% to 1.75% – the sixth consecutive hike.

The latest rise is likely to come as a major blow to already struggling landlords who are currently facing a barrage of factors that are greatly reducing profits from buy-to-let income.

Interest rates have more than doubled since the historic lows seen in October last year as the bank seeks to curb soaring inflation.

As well as the rising cost of buy-to-let mortgages, landlords are also having to face major legislative changes that are likely to have a significant impact on the property investment industry.

Many investors believe that new legislation set to be introduced by the government to protect tenants from unscrupulous landlords means the balance of power has now swung too far in the tenant’s favour, including a raft of changes such as abolishing Section 21 evictions and outlawing blanket bans on certain tenants.

There will also be strict new rules on the condition of a property before it can be rented out, in addition to the current requirements of a gas safety certificate and an Energy Performance Certificate (EPC).

Property Investment in the Current Climate

With the cost of mortgages soaring and the profitability of buy-to-let being squeezed all the time, is there still money to be made from property?

The answer to that question is definitely ‘yes’ – but the goal posts have certainly changed.

The good old days of buy-to-let offering fantastic returns or investors being able to flip a rundown property for a quick profit look to be over.

Property Master Chief Executive Andrew Stuart said:

“We have said for some years that increased regulation and higher costs were leading to the professionalisation of the private rented sector.  In reality this will mean fewer but larger landlords.  For many of the smaller players in this market unaffordable rises in mortgage costs will undoubtedly lead them to conclude buy to let no longer works for them.”

So, what’s the solution in these uncertain times?

Many investors are now favouring investment modes that do not involve an actual property purchase, thereby avoiding soaring buy-to-let mortgage costs while benefiting from professional management.

Indirect investment strategies such as REITs or Real Estate Investment Trusts have become increasingly popular with UK investors as they often offer attractive returns while also spreading the risk with other shareholders.

With a REIT, properties are bought, financed or operated on behalf of investors, with the income distributed to shareholders. This allows investors to reduce their risk while also being able to take advantage of pooling resources to reap the rewards of different types of real estate assets.

As well as offering the chance of handsome returns, the beauty of this type of investment is that it is completely hands-free for the investor, with professional management of the investment and no need to worry about day-to-day maintenance or legislative changes impacting landlords.

In times of rising interest rates, indirect investments such as property funds may be attractive in terms of delivering a return on investment while avoiding the threat of rising mortgage costs and legislative changes affecting private landlords.

Want more information on the different investment options available? Don’t hesitate to give us a call or reach out using our contact form.

Important note: The information provided in this article is general in nature and does not constitute personal financial advice. If you are unsure whether an investment is right for you, please seek professional advice. If you choose to invest, the value of your investment can both rise and fall so you may get back less than you put in.