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Soaring interest rates force landlords to change buying strategy

New buy to let purchases are increasingly being funded by cash rather than a mortgage, says Hamptons lettings agency.  

So far this year, 59 per cent of BTL purchases in Britain have been mortgage-free, well up on the full-year 53 per cent in 2022.

The biggest shift has come in Southern areas of the country, where yields tend to be lower.  So far this year 61 per cent of investor purchases in London, the South East, South West and East of England were made in cash, up from 47 per cent in 2022.  

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In contrast in the North of England, cash purchases have fallen year-on-year, from 62 per cent in 2022 to 60 per cent so far in 2023.  

This trend is being driven by higher interest rates and it’s in low yielding areas, particularly in the South, where investors may find it difficult to pass a lenders’ stress test and explains why more are turning to cash. 

The average landlord buying in the South of England during the last 12 months achieved a 5.4 per cent gross yield, compared to 7.5 per cent for those who bought in the North.

On a regional basis, London (the lowest yielding region in the country) saw the biggest jump in cash investors. Here, the share of buy-to-lets bought with cash has risen to a record 67 per cent so far this year, up from 43 per cent in 2022.  However, average budgets have shrunk, with the average investor spending £341,000 on their new BTL in the capital this year, down from £450,000 last year. 

 

To avoid failing lender’s stress tests and to maintain landlord’s margins, cash has become more popular in the lowest-yielding areas of the country.  

A record 71 per cent of buy-to-let purchases in areas where the average gross yield is less than five per cent were mortgage free so far this year, up from 50 per cent in 2022.

Hamptons says this marks a change in strategy for landlords.  

“Given that these properties are often located in the most expensive parts of the country, previously, when rates were lower, investors would use a mortgage to bridge the gap between their savings and the purchase price.  But at today’s rates, it’s harder for investors to pass a lenders’ stress test meaning more are having to rely on cash to fund their purchase” says the agency.

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  • Taifoor Chaudhry

    Landlords are selling and some buying back on cash

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    Good point, but clearly with less properties.

     
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    Well it's annoying that lenders stress tests are now so high. At only 75% LTV it's never going to be the lender's money at risk. If people have to buy with cash then there will be far fewer BTL properties available to rent going forwards.

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    Surely this will be the corporate Landlord's piling in, plus where Landlord's are haemorrhaging money the companies will be piling in that offer quick, no complicated take your property no matter the condition with or without tenancies and of course problem tenants. But hang on they only give you 70% of what the house is worth.
    Government levelling up no doubt.

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