Higher interest rates have been putting pressure on landlords and forcing some to sell up and others seriously considering it. But could the government’s scrapping of new energy regulations and rent rises stop the exodus? 

The Bank of England’s base rate stands at a 15 year high of 5.25%. It has risen sharply from 0.1% in December 2021 as the Monetary Policy Committee attempted to tame inflation.

This has affected the residential and buy-to-let mortgage markets. The Royal Institution of Charted Surveyors (RICS a trade body, says landlords have been leaving the market and warns that a reduced supply could raise prices for tenants.

Despite a heightened interest rate environment, other recent regulatory changes and predictions of increased rental prices mean there is still appeal in becoming a landlord.

In this article, we cover:

Read more: What’s happening to UK house prices?

How are higher interest rates affecting profits?

At the beginning of 2024, the average 2-year buy-to-let residential mortgage rate today was 5.95% and 5.91% for five years. Before the Bank of England started hiking rates at the end of 2021, you could get an average 2-year deal for 2.9% and 3.19% for a 5 year fix, according to Moneyfacts.

The good news is that if you had fixed for 5 years at 3.19% in December 2021, you don’t have to worry about higher interest rates for another 3 years. However, if you had fixed for 2 years, you will have seen a big change to your monthly repayments.

For example: If you own a rental property and with a mortgage of £250,000, your monthly repayments on 2.9% fixed deal would be £1,173. At 5.95%, you would need to pay £1,602 a month.

You could choose to pay the difference yourself, or pass it on to your tenants, but such a large increase may be impossible for them to meet.

However, it doesn’t mean that being a buy-to-let landlord is not financially viable in the current climate. It’s a common misconception that letting out properties is only profitable when a mortgage is being repaid in its entirety. 

Ultimately, your tenants are still paying you money that goes towards a property that you own, and if property prices increase over the long-term you could make a handsome profit by selling it.

There is also no telling what will happen to interest rates in the future. Rates are high right now, but falling inflation is likely to affect the base rate.

What tax bills do landlords face?

In 2016, the government implemented a 3% stamp duty surcharge on additional properties including second homes and properties purchased for buy-to-let purposes.

To give an example, a landlord purchasing a £300,000 property will pay an additional £9,000 compared to someone buying a home to live in. In Scotland, the surcharge for second homeowners and buy-to-let landlords is even higher at 4%.

Since 2017, the government has also been reducing mortgage interest relief. Previously, landlords were able to deduct the interest paid on their mortgage from their taxable income, providing a 40% tax relief for higher-rate taxpayers.

The current scheme offers landlords a flat-rate tax credit equivalent to 20% of their mortgage interest.

Additionally, landlords are now required to declare the income used to cover their mortgage payments on their tax returns. Under the previous system, they could declare rental income after deducting mortgage repayments. This change may push some landlords from the basic tax rate into the higher tax rate.

Adjustments have also been made to capital gains tax. In April, the capital gains tax-free allowance was reduced from £12,300 to £6,000. In April, this will halve to £3,000 and means landlords will need to fork out more in capital gains tax when selling property.

Read more: ‘Can we avoid £22,000 in stamp duty?’

Landlords may have to pay to be registered

The introduction of a new ‘Private Rented Sector Ombudsman’ intends to solve issues between landlords and tenants in a fair and impartial way.

In theory, this should make things easier for both parties. It also means that if a landlord does not adequately respond to a complaint, the tenant will be able to go straight to the ombudsman.

The ombudsman can then force the landlord to pay compensation of up to £25,000.

Landlords will have to pay to be registered – although a charge has not yet been set. Landlords who do not join could face hefty fines of up to £5,000.

Read more: Guide to property investment

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You may save money by setting up a business

You may be wondering whether to purchase a buy-to-let through your limited company.

This can be worth considering as it can decrease your tax bill if you’re a higher rate taxpayer. The rental income requirements can be lower for limited companies applying for home loans.

However, it’s worth bearing in mind that the number of buy-to-let mortgages on offer for limited companies tends to be lower than for private individuals.

Find out more about registering as a limited liability company (LLC) to buy a rental property. It is also worth speaking to an expert on this.

Regulatory changes which could make buy-to-let viable

Previously, the government planned on introducing new measures to make rented homes more energy efficient.

Currently in England and Wales, a private rented home must have a minimum energy performance of E before being let out. However, it planned to raise this to C from April 2028.

According to Koodoo, a mortgage broker, this meant many landlords were forced to budget in £8,000 to £10,000 worth of home improvements to meet these standards.

Prime Minister Rishi Sunak announced in 2023 that he was abandoning these plans. He said forcing landlords to burden these renovation costs was “just wrong” and in the interim the government would continue to subsidise a transition to greener homes. 

Koodoo stated after Sunak scrapped this plan it began to see more enquiries for buy-to-let mortgages because the proposed home improvements would have wipe out their yearly profits.

Read more: The pros and cons of green mortgages

Are buy-to-let mortgages difficult to get?

Applicants’ affordability when securing buy-to-let mortgages is typically measured by the interest coverage ratio (ICR). This ratio compares the rental income to mortgage interest payments.

While the criteria may vary between lenders, a lower-rate taxpayer would typically need the rental income to exceed the mortgage payment by 125%. Meanwhile, a higher-rate taxpayer would face a more stringent requirement, usually of around 145%.

Not too long ago, these ICR requirements used to be more demanding. It is only recently that lenders like Virgin Money and NatWest have started to ease out stress testing.

Furthermore, lenders employ stress tests to mitigate risks associated with potential interest rate increases. They’ll typically add 1% to 2% to affordability checks.

For instance, an investor with a property valued at £300,000 and an average gross yield of 6% would expect an annual rental income of approximately £18,000. Assuming a mortgage rate of 5% and a 25% deposit, the investor’s annual mortgage interest payment would amount to £12,504.

To meet the interest coverage ratio test of 125%, the lender would require rental income of £15,630 per year. This figure would rise to as high as £21,885 to pass the additional 2% stress test.

An average higher-rate taxpayer aiming to generate even a small profit in the first year would need to secure a gross yield over 7%.

However, basic-rate taxpayers only need a yield above 5%, giving them more flexibility.

You may want to take into account how house prices may evolve over time when making a buy-to-let property purchase.

If property prices fall, as they have in recent months according to some data, your capital will reduce. This means you could end up in the choppy waters of negative equity.

Read more: Everything you need to know about buy-to-let mortgages

Is it worth being a landlord in 2024?

If you’re considering becoming a buy-to-let landlord, you need to consider the following:

• Will you be able to make your mortgage repayments if mortgage rates go up?
• What kind of landlord will you be? If you do not respond to complaints, you could be hit with fines.
• Will you be letting property to students? If so, will it be a problem if they remain beyond the end of an academic term?
• Is it still likely to be a profitable endeavour after any tax implications are taken into account?
• Will you be able to secure a mortgage based on the rental income you expect to take?

While this isn’t law yet, potential landlords need to be aware of the Renter Reform Bill which was introduced into parliament earlier this year. If it came into effect, then it could make buy-to-let investment less appealing in the future. Our guide explains everything you need to know about this reform.

Read more: Tenancy rights explained