London landlords abandon the market as mortgage rates reduce profits

A quarter of the homes on sale in London are owned by landlords as punitive tax, and rising mortgage rates have forced buy-to let investors out of the market.

According to Zoopla, buy-to-let property investors in London are selling their properties at the highest rate in the nation. This is due to a combination between rising mortgage costs, and lower rental yields, which erodes the profitability of these investors.

The research revealed that 26pc of homes for sale in London during the first quarter of this year were rented out previously, which is more than twice the average of 11pc across the UK.

Just 5pc (or fewer) of the homes for sale in Scotland during this period were previously rented.

Lee Karasavvas is the managing director of Prolific Mortgage Finance. He said that the government’s tax crackdown against the buy-to let sector was mitigated for years by low interest rates, but now has been exposed by rising costs.

Moneyfacts, an information company, says that buy-to-let fixed rate mortgages are about double what they were one year ago.

Mr Karasavvas stated: “We’ve seen more and more property owners question their profit margins, with more asset stripping. They also place lower yielding properties onto the market.”

He added that landlords also sell properties with low energy efficiency in advance of the government’s planned introduction of minimum Energy Performance Certificate requirements for the private sector.

“We expect to see more landlords follow suit, as profit decreases and the cost of borrowing increases because of high rates and fees,” Mr Karasavvas stated.

Before 2017, landlords with properties owned in their names were able to deduct their entire mortgage interest cost when calculating their income tax profits.

Since then, this tax relief has been phased out.

Since April 2020 they will only be able to deduct 20pc if they do not own properties through a limited liability company. They will still pay the same amount of taxes even though high mortgage rates are eroding their profit margins.

London’s high housing prices have a negative impact on rental yields, which are lower in London than the rest of the UK.

Ten percent of the properties for sale in the South East are owned by landlords, which is the second-highest rate in Britain.

As falling property values and capital gains taxes start to discourage sellers, the share of landlords selling in London has decreased from 30pc at the peak of the pandemic boom. However, the numbers are up nearly a fifth since the beginning of 2019.

It is important to note that many landlords are selling their properties now because they cannot afford them and not because the time is right to sell.

Imran Khan, the chief executive officer of Property Loop in London, said that many landlords were struggling to make ends met, which led to an exodus.

Craig Fish, Director of Lodestone Mortgages and Protection said that high rates have caused some buy-to let properties in the Capital to become loss-making.

According to the Office for National Statistics, the rent growth in all types of rentals reached a record for the eleventh consecutive month in March.

In a note for investors, Brian Snow of Moody’s credit rating agency said that the government’s policy, high rates and inflation all work together to reduce the benefits of landlords charging higher rents.

Mr Snow stated: “Private landowners will struggle to maintain profits given the impact inflation has on operating costs combined with the increasing burdens of government regulations.”

The stress test for affordability by lenders will also make it more difficult for landlords to remortgage their properties when fixed rate deals expire.

Buy-to-let mortgages have an interest coverage ratio instead of income multiples.

The rental income must exceed the interest payments of a landlord by a certain amount.

Stress tests are higher when interest rates rise.

Rents must be raised to meet the requirements. If they cannot, landlords will not be able to remortgage. They may also face higher rates of product transfer and standard variable rates. This would further encourage them to sell.