The Price Index of Private Rents (PIPR) measures private-rent inflation for new and existing tenancies, while the UK House Price Index measures house-price inflation.
According to the PIPR, average private rents in the UK surged by 9.2% in the 12 months to March 2024, marking the highest annual percentage change since January 2015. England experienced the most significant increase, with London recording the highest inflation rate at 11.2%.
Investors must check local licensing requirements
Although this is not great news for renters, it is good news for buy-to-let (BTL) investors, who have struggled with meeting the affordability rules with the increased rates.
According to a recent study by Octane Capital, the average rental income has increased by 19% over the past two years, which aligns with the PIPR findings. As a result, the average yield of a BTL property investment has also climbed, from 4.9% to 5.8%.
The same Octane Capital study found that the ongoing costs of maintaining a BTL property had climbed by 18%, much of this being due to the rise in interest rates. Capital appreciation had also dropped, by 6%.
The effect means, in real terms, that net returns are lower than those seen by landlords two years ago.
Many BTL investors are looking at ways to drive more income by making changes to their properties
However, selling a BTL property may not be an attractive solution, with reductions to capital gains tax allowances from £6,000 in March 2023 to just £3,000 today.
The property rental sector plays a critical role in providing housing. With high mortgage rates deterring potential homebuyers, more people are turning to rentals. A National Residential Landlords Association study found that rental demand in the third quarter (Q3) of 2023 was three times as high as it had been in Q3 2019 before the Covid-19 pandemic.
Multiple tenants
So, how can mortgage advisers help their landlords to optimise returns and keep their properties profitable?
Many BTL investors are looking at ways to drive more income by making changes to their properties; for example, converting the property into a house of multiple occupation (HMO). Changing a single-family dwelling to one that is let to multiple tenants can help increase the property’s income and, in turn, the mortgage affordability.
The more knowledge the adviser has of the market, the more they can assist their investor clients
The adviser can assist the investor in the first instance with finance, such as a bridging loan, to make any conversions or changes necessary to maximise profit and ensure the HMO regulations are adhered to.
Once the work is complete, the adviser can assist once more, refinancing the property onto a term HMO mortgage.
Other investors are looking to short-term lets to drive more income, because these often yield higher returns than those of long-term rentals, especially in tourist-heavy areas.
Regulations
To advise clients on these types of mortgage, advisers should know not only the lenders and products in these areas but also the general market and regulations.
For example, more selective HMO licensing schemes were introduced in 2023, and more are planned.
Selective licensing is where the local authority designates areas in its borough that require an HMO licence beyond the mandatory requirements. It is a must for investors to understand and check local requirements on licensing, because lenders will lend only on a property that meets the requirements.
Once the alteration work is complete, the adviser can assist once more, refinancing the property onto a term HMO mortgage
One of the most important things a landlord can do is to review their rent regularly. Landlords with tenants that have occupied the property for some time often receive rent that is lower than the market rate. Advisers can discuss rental affordability with them so that the landlord can make an informed decision and find the balance between raising rents and keeping a property affordable for a good, long-standing tenant.
Other areas that advisers can explore, to assist clients coming off long-term rates and facing affordability issues, are lenders’ top-slicing BTL products, such as those offered by Accord, Aldermore and Zephyr.
Restructuring a portfolio could be another option. The portfolio may contain property with higher yields and equity. That property could be refinanced, or a second charge could be arranged to reduce the mortgage on the property that is struggling with affordability.
Selling a BTL property may not be an attractive solution, with reductions to capital gains tax allowances
Bank rate reductions are still expected to be some way off, and more BTL mortgages will need reviewing as they come to the end of low, long-term fixed rates.
The more knowledge the adviser has of the market, the more they can assist their investor clients.
Liz Syms is chief executive of Connect for Intermediaries
This article featured in the May 2024 edition of Mortgage Strategy.
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