Purchase yields for rent have reached an all-time low, fueling fears that real estate investors will sell out. Homeowners could soon generate losses as higher interest rates bite, while government crackdown on rent-buying tax further amplifies the pain of rising mortgage costs.
Nationally, gross rental yields are already at an all-time low of 4.38%. This is due to the fact that house prices have risen faster than rents.
Research consultancy Capital Economics has predicted that by the end of 2022 yields will reach a new low of 4.26%. As rising interest rates increase homeownership spending, next year the margin between rental income and mortgage costs will become the hardest hit since the financial crisis.
According to Hamptons real estate agents, the Bank of England’s decision to raise the bank rate to 1.25% will bring the average net profit of a new rental property down 15% for a owner who pays a higher rate tax.
In London, an investor who pays higher taxes will see their net profit fall by £ 840 a year, 29% less than before the rate went up.
“The bank rate will only need to reach 2% before the average homeowner with a higher rate tax sees their profits more than half,” said Aneisha Beveridge of Hamptons.
Capital Economics has predicted that the bank rate will reach 3% next year, but a typical rental purchase will generate losses much earlier.
An average homeowner with the highest tax rate will see their investment in losses if the bank rate reaches 2.75%. At this point, a typical rental purchase mortgage rate would be 4.11 pc, meaning they would lose £ 97 per property and year. At 3pc, their annual losses would jump to £ 403.
London homeowners will be the hardest hit, Beveridge said. “Here, profits would fall by 59% if the bank rate rises to 1.5%,” he said. If interest rates rise to 2 per cent, a typical London homeowner will lose £ 501 a year per property. At 3pc, the annual loss would be £ 2,180.