Landlords remain confident in face of rising mortgage interest rates

05.02.18

Mortgage interest rates in the UK are likely to rise later this year, but according to recent data, landlords remain confident about coping with increased outgoings.

Some 51% of experienced landlords are saying that any decision to sell properties is not dependent on mortgage interest rate, according to the latest private rented sector trend report from Paragon. Of the remaining 49%, the average mortgage interest rate at which landlords said they would consider selling properties is 5%.

The trend report points to continued stability in the buy to let sector, with the average number of properties owned by landlords still 13 for the third successive quarter and in line with the long term average of 13 properties since the end of 2007.

The average market value on property portfolios in the last quarter of 2017 was £1.65 million, nearing record levels and continuing the long term upward trend tracked from £1.3 million in 2004. The average gross rental rate of return for all landlords was 6.3%, in line with the long term average tracked for over 10 years.

For the first time in over a year, the number of landlords expecting to purchase buy to let property in the next quarter increased, from 7% in the third quarter of 2017 to 9% in the fourth quarter. This is, however, an increase from record lows and remains some way off the peak of 20%.

While the disparity between landlords expecting to buy and sell didn’t increase further in the fourth quarter, more landlords also say they expect to sell some or all of their buy to let property in the first quarter of 2018, up 4% to 23%, and the second highest percentage ever recorded.

Amongst landlords expecting to purchase buy to let property in the first three months of 2018 the most common type of property is semi-detached, with 35% indicating this as most likely. There is a notable decrease in the proportion of landlords expecting to purchase a flat or maisonette, down to 30% from 55% in the third quarter of 2017.

The research also shows that gearing reached an all-time low in the final quarter of 2017, the joint lowest level in over 15 years, as landlords continue to reduce borrowing. Average LTV of investment property portfolios was 35% as recent fiscal and regulatory changes targeting landlords dampened the motivation to take higher LTV buy to let mortgages.

“In response to fiscal changes over the last two years, landlords are clearly less willing to take higher loan to value mortgages and borrow more, whilst regulatory changes, though welcomed by lenders, have constrained the market in its ability to offer higher LTV mortgages,” explains John Heron, managing director for mortgages at Paragon.

“Despite much noise to the contrary, and whilst some landlords have responded to a turbulent market by selling property, we’ve seen no material evidence of a mass sell-off by landlords. What we continue to see is strong performance of property portfolios, with a long term upward trend in values and a stable outlook in portfolio size and returns.”

He adds:  “There is no evidence to suggest lending to landlords has been anything other than sustainable. With low levels of gearing landlords appear well positioned to withstand the higher interest rates that the markets are anticipating, which is good news for buy to let and the wider private rented sector.”

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