With rates having increased and mortgage products following suit, it seems a normal BTL purchase now becomes unviable, unless you put down a large deposit or the yield is exceptionally high.
Could this mean the end of BTLs? At least until the rates come down again? I think lenders will respond, by not making their products cheaper, but adapting them to fit the new environment.
What I mean by this is they would look to increase the arrangement fee, and therefore lower the month to month interest rate, so overall nothing has changed but it now is likely to fit the lenders rental multiple.
Already many large agents have priced the stock they are selling at a yield of 7.2%. These are good quality properties in solid locations. This was unheard of a few years back, the price has been driven by the rate rise and the anticipated rise.
Does this mean an end to BTL investments? I don’t think so. The immediate test of the market without any time lag is the auction results. Allsop results, on the 22nd June 2023, shows a sales rate of 70%, with over £43M raised. This was on the day of the rate rise.
The appetite for property is strong in the UK; far more than the rest of Europe. UK property is also perceived as a safety net when there is instability in the market place. It has behaved unintuitively, in times of uncertainty, with some locations actually seeing a price rise, notably Kensington and Notting Hill. This is to do with a global perception of London property being a sort of safety deposit box against the turbulence of the global economy.
Certainly this will be enough to scare novice investors. But the seasoned ones know this is the time when bargains will begin to come to the surface.
One needs to look at the deal in a pragmatic manner. If you’re paying say 6% on your five year fixed mortgage, then it could be argued you’re paying about 1.5% extra, therefore I would look to take this amount off the property price, and a little more for the effort. So I would expect at least a 10% discount on anything I invest in, in this environment. The other concern is if you purchase at a certain price, the property value is likely to drop further after the purchase. The chances of this happening is strong, obviously depending on the price you came in at.
There are only two ways to make money in property, one is capital growth and the other is income, no third way. Therefore another angle is to ensure the income side is generating month on month a positive cash flow. In this type of environment, rents will be increasing, as the first time buyer will be unable to get on the first rung, therefore increasing the demand for rentals.