Key points –

1. Buy-to-let landlords in the UK are facing an 80% rise in borrowing costs over the next two years, threatening the viability of their small-scale rental businesses.
2. The financial strain on landlords, who mostly earn modest profits, is expected to lead to increased rental prices as they struggle to cover soaring interest rates.
3. Most landlords in the private rented sector have limited external income sources, with their non-rental income closely matching that of their tenants.
4. Changes in tax and regulation have significantly increased the operational costs for landlords, with a notable percentage considering exiting the market if a rent freeze is mandated.
5. Despite these challenges, a majority of landlords are committed to staying in the sector long-term, with many planning to expand their property portfolios in response to rising tenant demand.

The Intermediary Mortgage Lenders Association (IMLA) has warned that buy-to-let (BTL) landlords in the UK are on the verge of a financial crisis, with borrowing costs expected to skyrocket by a staggering 80% in the next two years. This dire prediction shatters the common belief that landlords are wealthy investors immune to financial strains. Instead, the reality is quite different, and it’s small landlords who are most at risk.

The Plight of Small Landlords

The IMLA report emphasises the crucial role of the private rented sector (PRS), which houses 20% of UK households. Executive Director Kate Davies sheds light on the misunderstanding surrounding landlord finances. Contrary to popular belief, many landlords are small businesses with limited profits, now facing soaring costs due to rising interest rates. This situation forces them into a corner where increasing rents might become the only viable option to sustain their businesses.

Financial Breakdown

The financial situation for landlords in the PRS, according to the IMLA report, is quite concerning:

• Median Annual Rental Income: £14,000
• Median Annual Profit: Less than £9,000
• Expected Increase in Annual Interest Payments by 2025: £7,700

Most landlords rely heavily on their rental income, with limited external financial sources.

Income Comparison – Landlords vs. Tenants

Interestingly, landlords’ non-rental income is, on average, similar to their tenants’, except in London, where tenants generally earn more. The median figures paint a clear picture:

• Landlord Median Non-Rental Income (National, including London): £39,000
• PRS Tenant Median Income (National): £37,000
• PRS Tenant Median Income (London): £50,000

Furthermore, the report highlights that 80% of landlords own one or two properties, signifying their small-scale operations.

Challenges Ahead

Davies warns of tough times ahead for all involved in the PRS. The endurance of landlords, many of whom plan to stay and potentially increase supply, is commendable. However, policymakers are advised to tread carefully, ensuring their actions don’t further disrupt the already delicate balance in the PRS.

Tax and Regulation

The viability of small landlord businesses has been hit hard by changes in tax and regulation. While only 36% believe they’re paying more tax due to the removal of mortgage interest deduction, IMLA’s calculations suggest a higher impact at 58%. Additionally, 64% have reported increased costs due to more stringent regulations.

The Potential Impact of a Rent Freeze

If a mandatory rent freeze were to be imposed, 7% of landlords claim they would have to sell property or exit the market altogether.

Despite these challenges, the majority of landlords appear committed to the PRS for the long haul. Contrary to the expectations of a mass exodus, a significant portion of mortgaged landlords (53%) and unmortgaged investors (25%) plan to acquire more property over the next five years.

Supply and Demand

This trend reflects a desire to meet the increasing tenant demand, offering a glimmer of hope in a sector desperately in need of supply. However, the average Return on Investment (ROI) stands at a modest 3.7%, suggesting that corporate or institutional investors might not be the solution to affordability issues in the PRS.