Interest rates, tax, arrears: landlords face challenging 2024

Property investors face a triple threat of mounting borrowing costs, rising arrears and a watchful taxman.

More than a quarter of landlords are looking to reduce the size of their portfolio next year.

That’s according to a new study from insurance firm Alan Boswell, which polled property investors on their ambitions for the year ahead.

It’s certainly not the only study that has pointed towards some investors looking more sceptically at property.

Analysis by Hamptons for example found that the proportion of homes being purchased by landlords has declined to its lowest level since 2010.

Given the challenges faced by landlords in recent times, it’s perhaps not any great surprise that so many are eyeing the exit.

The price of borrowing

An obvious difficulty faced by any landlord, or potential property investor, today is that the cost of borrowing is much higher than it has been in recent years.

The rising Base Rate has not only impacted residential borrowers, but landlords too.

Data from Moneyfacts shows that the average two-year fixed rate for buy-to-let borrowers hit a peak of almost 7% back in July, where two years previously the equivalent rate had been just 2.95%. 

That was the highest average rate in Moneyfacts records, while it was a similar story on five-year fixes.

And while those rates have started to come down since then, they remain high enough that you need to be really serious about investing in property in order to go through with it.

Making the sums add up

It’s not just the interest rates that are such a big challenge though.

When mortgage lenders assess a landlord, they also take into account the interest coverage ratio.

Essentially they want the rental income to be significantly more than the interest on the loan, usually by 1.25 times, though in some cases they want it to be 1.5 times higher.

That puts landlords in a really difficult spot. It may be that they have little choice but to hike rents substantially in order to pass that particular test and get the funding they need, and, while I know landlords are often seen as profit-hungry pantomime villains, the reality is that there will be plenty who don’t want to do that.

They have decent, reliable tenants in place and don’t want to lose them, recognising that the tenants already have higher costs on every other outgoing and may not be able to afford that higher rent.

Making these particular sums add up is proving an enormous challenge. 

Falling behind

Those sums only become more testing when you consider the increase in buy-to-let arrears.

Analysis from Octane Capital shows that cases where borrowers are in arrears of at least 2.5% of the outstanding balance has more than doubled to a record high of 11,540, and has been rising consistently over the last year.

It’s pretty difficult to keep a landlord business going if you aren’t regularly receiving rent on time from your tenants.

Perhaps tax does have to be taxing

Over the last few years, increasing numbers of landlords have opted to purchase property through a limited company, rather than in their own names.

As we have explained previously on loveMONEY, doing so can potentially boost profitability and ensure access to tax reliefs that aren’t available if you buy an investment property as an individual.

To put that into context, between 2015 and 2022 the numbers of landlords operating in this way has jumped by 250%, with record numbers opting for a limited company structure last year.

While we have also highlighted the risks of doing so, it seems that the taxman is now also on the hunt. 

The Telegraph has reported that HMRC is sending out letters to landlords, warning them to make sure their tax returns are correct.

The letter warns that the taxman’s information suggests “too much incorporation relief” may have been applied, leading to smaller bills.

It follows a previous drive around the level of Income Tax being paid by landlords, with the implication that the taxman is watching you carefully if you happen to have invested in property.

Green improvement requirements ditched… for now

One potential crumb of comfort for investors came from the Government’s decision to row back on certain green pledges.

New rules were due to come in which would have forced landlords to improve the energy efficiency of properties before they were allowed to be let out, with rental properties needing to achieve at least a C rating on their energy performance certificate. 

This was due to begin in 2025 but was ditched, potentially saving landlords significant sums on refurbishment costs in order to meet those higher standards.

The trouble is that plenty of landlords wanted to be ahead of the curve, and had already raised the funds in order to carry out that work. 

What’s more, there remains the question of how long-lasting a reprieve this truly is.

The clear direction of travel is that we need to improve the efficiency of our housing stock, so it seems inevitable that a future Government will want to push the rental market to improve its performance here at some point.

Investing for the long term

It’s also worth noting the drops in house prices over the last year.

The higher borrowing costs have understandably dented activity levels, and that has meant house prices have cooled.

In order to sell, vendors increasingly have to accept a sizeable discount off the asking price, the highest seen in around five years according to Rightmove data.

For some landlords, this represents a bit of an opportunity.

Given the rate at which we build homes in this country, we are some way off making a dent in long-term demand, so over the long term it seems likely that property will continue to get more expensive.

If they have the funding, and can make the sums add up, these lower headline prices could allow them to add to their portfolios in a cost-effective way.

So for all of the downsides that landlords face currently, if they are able to take a long-term approach there is the potential to pocket some capital gains down the road.

That said, there are plenty of downsides to navigate past in order for that to make sense, so it’s little wonder that so many are at least opting to wait and see, if not looking to sell off elements of their portfolio.