Could the 13th consecutive rate increase be an opportunity for investors?

Posted on Monday, June 26, 2023

Many mortgage holders will be reeling following the Bank of England's latest interest rate hike in its ongoing attempt to tackle inflation. And with the new rate of 5% the highest in 15 years, many landlords will be looking for the exit. However, this presents increased opportunities for property investment, according to Finbri. 

The number of properties available to rent fell by a third in the 18 months to April. Simultaneously rental demand has increased 50% above the normal levels - so many renters are facing increasing competition for places to rent as landlords are set to leave the sector in droves.

A survey of 1,001 landlords by Finbri discovered 45% would sell their investment properties, and the same number would consider alternative investments when the base rate was at 4.5%. With the interest rate now hitting 5%, the number of landlords leaving the market is likely to increase.

This is further supported by research by the National Residential Landlords Association that discovered in Q1, 33% of its members said they intend to cut back the number of properties they have available to rent, 20% more than the same period last year.

However, there are mixed signals in the market as 6 in 10 landlords are looking to expand their portfolios in the next two years, according to The Deposit Protection Service. There are signs of those looking to capitalise on the increased amount of properties to invest in.

How much does the average BTL investment cost?

The average purchase cost of buy-to-let property varies significantly depending on location, property type, and market conditions.

However, it's worth noting that buy-to-let investors typically need to consider not only the property purchase price but also associated costs such as stamp duty, legal fees, renovation expenses, and ongoing maintenance costs.

Where in the UK are the best rental yields?

For those looking to capitalise on the increased opportunities in the BTL market, the best rental yields in the UK can vary depending on various factors, including location, market conditions, and property type.

Certain regions or cities may offer more favourable rental yield opportunities than others. However, conducting thorough research and considering multiple factors is important before determining the best areas for rental yields.

These areas often benefit from a combination of strong rental demand, lower property prices compared to London, and attractive rental income-to-property cost ratios.

However, it's essential to seek advice from local property experts or consult reliable property investment resources to gain a more accurate and up-to-date understanding of the rental market dynamics in specific areas.

Whilst rental demand increases, market difficulties may lead investors down a different path

According to a recent study by Hamptons, using official data from HM Revenue and Customs, it has been discovered that during the tax year of 2020-21, revenue from short-term holiday rentals in the UK reached £15,600. In comparison, traditional buy-to-let properties generated £13,400 in income. This marks the first instance where holiday let income surpassed that of traditional rental properties.

The increasing revenue from short-term holiday rentals compared to traditional buy-to-let properties indicates a potential shift in investor preferences. While rental demand in the traditional buy-to-let market may increase, some investors may be drawn to the higher income potential offered by short-term holiday rentals.

Investing in short-term holiday rentals can provide several advantages. Firstly, the income generated from holiday rentals is typically higher due to the short-stay premium rates.

Additionally, holiday-let properties often experience peak seasons where demand and rental rates are significantly higher, allowing investors to maximise their returns during these periods.

However, it's important to note that investing in short-term holiday rentals comes with its own set of considerations and challenges. Managing a vacation rental property involves more hands-on involvement, including property maintenance, guest turnover, marketing, and dealing with seasonal fluctuations in demand.

Increased mortgage rates increase repossessions

UK homeowners are facing financial constraints and struggling to meet their monthly mortgage obligations and there has been a notable increase in the number of home repossessions. In the first quarter of 2023, more than 1,000 homes were repossessed, indicating a 50% surge compared to the previous quarter. Out of the total, 750 properties were owned by homeowners, while an additional 410 buy-to-let properties were subject to repossession.

8 in 10 mortgage customers have a fixed rate mortgage and with 1.4 million set to remortgage in 2023, many are set to face a shock now that the average two-year fixed deal, which was 2.29% last year, is now above 6%.

As lenders want to recoup their losses as quickly as possible with a fast sale, many choose to sell repossessed properties at auction, which opens up investment opportunities for BTL properties or holiday-lets.

How can investors ensure opportunities aren't missed

Investment properties can be funded through different financing options, including secured and unsecured loans. In addition, investors can take advantage of equity release schemes or even raise capital from family members or friends.

Here are some finance options used by property investors:

Bridging Finance: Bridging finance is a short-term loan option used when there is a need for quick funds to bridge a financial gap. Property investors may use bridging finance to secure a property before selling another one or to finance renovations or property development projects. Bridging loans usually have higher interest rates and are repaid within a short period, typically up to 12 months.

Finbri's bridging finance report found that of those who used bridging finance on more than one occasion, 31% used it to purchase a residential investment property

Buy-to-Let Mortgages: Buy-to-Let loans are specifically designed for purchasing properties to rent them out. These mortgages often require a larger deposit and have higher interest rates than residential mortgages. The rental income generated from the property is usually considered when determining the loan amount.

Development Finance: Development finance is used for property development projects, such as constructing new buildings or converting existing properties. These loans are typically tailored to the project's specific needs and are released in stages based on the development progress. Interest rates for development finance are generally higher, and repayment terms can be structured according to the project timeline

Equity Release: Equity release allows property investors to release the equity tied up in their properties without selling them. This can be achieved through various methods, such as remortgaging or taking out a home equity loan. The released funds can be used for further property investments or other purposes.

For those considering leveraging debt to purchase a distressed property, it is important to remember that lenders usually require a higher deposit (20-30%) and have stricter rules in place for repossessed/distressed properties.

Buying distressed properties can be a prime opportunity for investors to acquire property at lower prices.

However, it is important to have considerations in place such as financing options and refurbishment/repair plans before completing the purchase. With thorough research and preparation, investors could make a sound investment decision that could lead to potential long-term growth and success.

A spokesperson from Finbri concluded: “Despite the significant challenges faced by the UK's private rental sector, there are still opportunities for investment in buy-to-let properties. While the number of properties available to rent has decreased and landlords are threatening to leave the market, rental demand has increased significantly and property investors will undoubtedly seize this opportunity.”

Via @PropertyReporter