London landlords abandon market as mortgage rates erode profits

Landlords are behind a quarter of homes for sale in London as punitive taxes and soaring mortgage rates force buy-to-let investors to quit the market.

Buy-to-let investors in the capital are selling up at the fastest rate in the country, according to property website Zoopla, as a combination of rising mortgage costs and low rental yields erodes their profitability.

Of the homes listed for sale in the capital during the first three months of this year, 26pc were previously let out, the research found, more than double the 11pc average across the rest of the UK.

In Scotland, just 5pc of homes listed for sale during the period had previously been let out.

Lee Karasavvas, managing director at Prolific Mortgage Finance, a mortgage broker, said that the Government’s tax crackdown on the buy-to-let sector had for years been mitigated by low interest rates but has now been laid bare by rising costs.

Buy-to-let fixed rates are roughly double what they were a year ago, according to Moneyfacts, a data company.

Mr Karasavvas said: “We have seen more and more landlords questioning their profit margins with more asset stripping and placing lower yielding properties on the market.”

Landlords are also selling properties with poor energy efficiency ahead of the Government’s planned introduction of minimum Energy Performance Certificate requirements for the private rental sector, he added.

“We expect more landlords to follow suit as the profit reduces and cost of borrowing rises due to high rates and high fees,” Mr Karasavvas said.

Before 2017, landlords who owned properties in their own names could deduct all of their mortgage interest costs when calculating their profits for income tax purposes.

This tax relief has since been phased out.

Since April 2020, unless they own properties in a limited company, they can deduct only 20pc of their interest costs. This means that they will continue paying the same amount of tax even as high mortgage rates erode their profit margins.

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Landlords in the capital are particularly exposed because high house prices mean rental yields in London are much lower than across the rest of the country.

In the South East, where rental yields are also low, landlords made up 10pc of all properties listed for sale, the second highest rate in Britain.

The share of landlord sellers in London has declined from a peak of 30pc during the pandemic property boom, as falling property prices and capital gains tax rises start to deter sellers, but the numbers are still up by nearly a fifth compared to the start of 2019.

Crucially, many of the landlords selling now are bringing properties to the market because they can no longer afford them, rather than because it is an opportune time to sell.

Imran Khan, chief executive of Property Loop, a London lettings agency, said: “Many landlords are struggling to make ends meet, leading to a concerning exodus from the market.”

Craig Fish, director of Lodestone Mortgages and Protection, said high rates meant some buy-to-let properties in the capital have become loss-making.

Rent growth across all lets hit a new record high for the eleventh month in a row in March, according to the Office for National Statistics.

But in a note to investors, Brian Snow, senior analyst at Moody’s, a credit ratings agency, said that the benefits of higher rents for landlords are eroded by a combination of government policy, inflation and high rates.

Mr Snow said: “Private landlords will struggle to maintain profit margins given the impact of inflation on operating costs coupled with the increasing burden of government regulations.”

Lenders’ affordability stress tests also mean landlords will find it increasingly difficult to remortgage when their fixed-rate deals expire, Mr Snow said.

While affordability for residential mortgages is based on income multiples, buy-to-let mortgages are assessed based on interest coverage ratios.

This means the rental income must be a certain percentage above a landlord’s interest payments.

Higher interest rates mean much higher stress tests.

If landlords cannot raise rents enough to meet these requirements, they will be unable to remortgage and may face higher product transfer or standard variable rates, which would be a further incentive to sell.