uk buy to let rental market forecast 2023

Across his portfolio, his blended average mortgage rate has climbed from 2.4pc to 4pc in a year. “It will continue to rise. If we get to 5pc or 6pc, then we are in a lot of cashflow trouble,” Mr Smith said.

Seven of his properties are on fixed rates at 1.99pc that end in March. When he refinances, this rate will likely triple. 

Mitigation plan

If a typical higher rate taxpayer landlord in the South East remortgages after two years, they will have a mortgage bill of £9,601 (assuming a rate of 5.14pc) and taxable rental income of £11,680, according to analysis by Hamptons estate agents. 

They will pay £2,752 in tax. This means that overall the property will make a net loss of £673 per year.

Landlords who own properties in limited companies can still offset their mortgage costs against their tax bill, but the process of incorporating an existing portfolio is expensive. 

In the eyes of the taxman, the transaction is considered both a sale and a purchase, meaning the owner must pay both capital gains tax and stamp duty, despite releasing no cash. There are ways to reduce this bill, but it becomes harder if the properties are not owned outright.

Smith and his wife had moved their portfolio into a partnership, which should have allowed them to save £400,000 in stamp duty when they incorporated and get relief on their capital gains tax bill. 

But this plan was scuppered because the properties were mortgaged, which meant the transaction constituted a “cash consideration” rather than simply a transfer of shares. Suddenly, they faced a £500,000 capital gains tax bill. They have kept the properties in their own names – and now will be hit even harder by rising rates.

Smith’s plan is to sell off a chunk of his portfolio to reduce the mortgaged share of his portfolio from 50pc to 20pc.

Unmortgageable properties – and a ceiling on rents

Injecting cash into their portfolios and raising rents will be the only options for many landlords, if they do not sell. Otherwise, many will find their properties are unmortgageable. 

This is because lenders assess affordability for buy-to-let mortgages based on interest coverage ratios (ICR). For limited companies and basic rate taxpayers, the rental income on a property must be 125pc of the mortgage interest. For higher rate taxpayers who own properties in their own name, the ICR test rate is 145pc. 

This means that if the mortgage rate goes up, the rent will likely need to increase in response if the landlord wants to be able to refinance. But there is a ceiling on how much landlords can charge: the market is already creaking, as tenants become unable to pay ever higher rents, made worse by the cost of living crisis.