As Interest Rates Continue to Rise, is it Still Worth Being a Landlord?

Last month we saw the Bank of England (BoE) raise the base rate half of one percent to 5%. This raise means that the retail sector is now looking at mortgage rates of 6-plus percent – rates are higher still for buy-to-let mortgages.

The question that this raises is fundamental for landlords, and more so for those contemplating investing in buy-to-let property for the first time – is it still worth being a landlord?

As a property professional with years of experience, and whose business is founded upon the basis of serving the buy-to-let community, this is a serious question.

On a purely financial basis, especially for prospective investors and current landlords, is buy-to-let property investment still a viable option?

You’ll realise that the answer to whether it’s worth being a landlord is multi-faceted, so let’s spend some time looking at the various factors which affect the answer to this most crucial question.

Are interest rates the most important factor?

If you are going to borrow to invest, they are a, if not the most important factor you’re going to have to consider.

While interest rates were at an historic low, the answer largely wrote itself – yes. The cost of borrowing was low, rental income was buoyant and property prices were affordable, but with the promise of capital growth in the short to medium term.

Pundit had long been predicting a crash in housing prices, and as we have written before, the UK market has proved itself remarkably resilient in the face of a global downturn in property values.

While we’re not experiencing a crash, there is no doubt that property prices in the UK are trending downwards at present. Which, quoting the Nationwide Building Society, sums it up well – prices down 3.5% but no sign of a dramatic collapse yet.

For a prospective investor asking whether it’s worth being a landlord, this is a double-edged sword. Falling prices make it easier to acquire property at an advantageous price, however the prospects for capital growth in the short to medium term are also reduced.

At the same time, rising borrowing rates mean that the cost of buying property is going up, and that increase will almost certainly feed into rents. Barclays Bank is advertising rates of between 6.3% and 6.9% for a buy-to-let mortgage.

Those rates were current as of the 12th of July 2023. The underlying calculation for landlords is; can rental income keep up with rental costs and deliver a workable yield?

While all of this is true, it is worth remembering that interest rates affect more than those looking to mortgage property purchases. They also affect savers too.

In theory, rising rates make saving more attractive. Reality however suggests that banks are very slow to pass rising rates on to savers, and even when they do, the higher inflation rates which cause these rises are whittling away value.

The upshot is that while saving during a period of rising interest rates may seem preferable to investing, when you factor in all circumstances leading to increased savings returns, you may well find returns aren’t as attractive as you think.

Considering other factors

While it is true that rents can be increased to offset increased costs, in an economic situation such as the UK finds itself at present, there will be a point where rents which are too high will become prohibitive.

Rent affordability

Tenants, landlords and pretty much everyone else is feeling the pinch thanks to a multitude of factors, not all of them in the gift of the government to deal with should they choose to.

So while landlords are calculating whether or not a potential investment can pay off, prospective tenants are looking at market rents and calculating whether or not they can afford them.

The lack of housing stock in the UK has thus far ensured keen competition for available properties, whether to buy or to rent. It is likely that while that shortage will persist, the financial calculations are going to become harder to square.

The Office for National Statistics defines ‘affordable rent’ as constituting no more than 30% of household costs. An article in Property Reporter states that 31% of rental properties exceed this metric.

Unsurprisingly much of this is in London, but not all. In Brighton and Hove, rent can account for up to 60% of household income. Remember that these figures mean that 69% of lets are, on paper, affordable, but the numbers are sobering.

Rental demand

That said, there is no sign of diminishing demand for good, affordable rental accommodation, quite the opposite. The UK suffers a chronic shortage of accommodation.

We examined this in our blog ‘Why is There a Strong UK Property Market in the Midst of a Global Downturn?’, concluding that there is a systemic and long-standing shortage of housing stock.

This alone will continue to drive demand for the foreseeable future. A lack of potential tenants is not going to be a problem faced by landlords any time soon.

Regulation

The past months have seen what the present government thinks the private rented sector (PRS) in England needs in terms of new regulation. The name of the bill, the Renters (Reform) Bill gives a clear clue as to its emphasis.

Combined with forthcoming changes to mandatory Energy Performance Certificate (EPC) requirements, there has been much talk amongst the members of the PRS about whether or not this was their personal tipping point.

There is uncertainty about when the EPC changes will apply from, and we wait to see how quickly the Bill passes through parliament, but it’s clear changes are coming.

The Scottish Government has already introduced greater regulation to the Scottish PRS, and while not always popular with landlords, it hasn’t diminished demand north of the border.

You can get a feel for what a Labour government has in store for the PRS in England from their PRS Standards document. So, red or blue, landlords both extant and prospective are going to have to operate in a very different environment.

At present, the best we can do when trying to quantify the possible costs of these changes is to speculate, and there has been plenty of that in the past few months.

What are landlords saying?

There has been a lot of online traffic about all of the above, and whether or not it’s still worth being a landlord. So, let’s see what landlords have to say!

NOTE: It’s important to remember if you’re delving into these conversations that posters are self-selecting – that is they choose to comment. Make of that what you will! It does mean that when reading posts, especially at the extremes of opinion, a large pinch of salt to hand is a prerequisite.

That said, there has been a solid core of ‘I’m selling up while I still can’ posts, as landlords fear the passing of Section 21 no-fault evictions. Others are concerned about the costs of meeting EPC requirements, as and when they’re introduced.

It’s worth noting that no-fault evictions were removed from the landlord’s toolkit in Scotland some years ago. It may be some comfort to English landlords to know that the impact of the change in Scotland was minimal.

In researching this blog, it’s fair to say that we haven’t seen anyone posting that they are just loving the current situation and cannot wait for more regulation to appear!

Advice from the property pros

So, IS it still worth being a landlord? Prepare yourself for some horse-for-courses opinions.

If you are a cash buyer with a sanguine attitude towards coming regulation, the market is probably yours for the taking.

Falling property prices (albeit slowly falling) and rising interest rates will make the market both more attractive to buyers and you may well see less competition for the properties that are available.

If you’re able to buy well and aren’t wholly dependent on rental income to pay a mortgage, you can still receive a worthwhile yield in many parts of the UK.

Looking to the medium to longer term, property values have proved to be robust so if you can see out the current turbulence in the market, the chances are that you can still realise worthwhile capital growth as well.

If you are reliant on borrowing to finance your investment, it’s critical that you do your sums thoroughly. How much of the buying price do you need to finance? What’s the best rate you can get? What is your likely yield and will it meet your commitment?

How healthy is the rental market where you’re planning to invest? How healthy is the local economy?  These are all questions you should be asking anyway, but with so little slack in the calculations at present, they are crucial to your decision.

In summary…

We live in interesting times, and some may be asking whether it’s still worth being a landlord. Sadly, it can be hard to see light at the end of the current tunnel, so getting your strategy right and understanding whether the numbers work for or against you has never been more necessary.

The demand for quality accommodation hasn’t abated so there are still many opportunities out there. Location can be key at present – the North of England, both east and west could be a better bet at present.

Scotland also continues to offer some excellent opportunities for those looking to enter the property investment market, many of those opportunities being found outside the major conurbations of Edinburgh and Glasgow.

With decades of combined experience in the buy-to-let property investment market, we are ideally placed to help you answer the question: is it still worth being a landlord?

Drop us an email or pick up the phone. We’ll be happy to sit down with you and help you look at your circumstances and what you are looking for and guide you through the potential benefits and pitfalls of property investment.

Phew! That’s been a long one – thank you so much for reading this far.

Written by Ross MacDonald, Director of Sales & Cofounder of Portolio

Get in touch on 07388 361 564 or email to [email protected]