Introduction
The buy-to-let market in the UK has undergone big changes in recent years, sparking growing debate about its viability as an investment strategy. Once perceived to be a popular route to wealth creation on the back of rapidly rising house prices, buy-to-let has faced numerous challenges, from regulatory changes to tax reforms. However, despite these hurdles, the sector continues to play a crucial role in the UK's housing landscape, providing homes for millions of renters. Investors have adapted and found new ways to protect themselves, helping them grow over the long term.
Current state of the UK buy-to-let market
Legislative and tax changes, combined with higher costs, have dented the profitability of buy-to-let. However, despite the fears, there hasn’t been a mass sell-off in buy-to-let stock. Rather, landlords have adapted by setting up limited companies and pumping more cash into their portfolios to set themselves up for the long term.
However, appetite from new landlords to enter the market has waned. The increase in stamp duty surcharge for second homeowners from 3% to 5% has driven up entry costs, while relatively high interest rates have made borrowing costly. The introduction of more stringent energy efficiency requirements and upcoming changes in the Renters’ Rights Bill have also added to the cost and complexity of property investment.
Recent trends show a moderation in rental growth, however, the record-breaking increases seen in 2022 and 2023 have helped offset some of the pain for landlords. According to our monthly lettings index, the average rent on a newly let home in Great Britain rose 1.8% year-on-year to £1,372 pcm in January 2025, the slowest pace of annual growth since October 2020. However, over the last five years, the average rent in Great Britain has risen by 34% or £348 pcm, outpacing both inflation and house price growth.
The scale of rental growth seen over the last few years has boosted yields. In 2024, the average gross yield on a new buy-to-let purchase in England & Wales hit a record high of 7.1%, up from 6.1% in 2019. The North East offers the strongest returns in the country, averaging 9.7% in 2024 compared to London's 5.7%. However, over the last 20 years, generally, properties in the South of England have benefitted from stronger capital growth and less house price volatility.
Challenges facing buy-to-let investors
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Increased taxation, including higher stamp duty costs and changes to mortgage interest relief, has squeezed profit margins. Particularly for landlords who bought relatively recently. However, some investors have set up limited companies to hold their buy-to-lets so that they can still offset their costs and reduce their tax burden.
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Higher mortgage rates have dented profitability, though there are signs of easing. The average rate on a 75% LTV buy-to-let mortgage fixed for 2 years fell to 4.30% in February, down from a high of 6.22% in July 2023. This puts borrowing costs back to 2013 levels, although average loan sizes are now considerably larger.
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Stricter regulations, such as EPC standards and proposals in the upcoming Renters' Rights Bill, present cost implications and add complexities when letting a property.
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Economic uncertainty continues to affect the property market, influencing both house prices and rental demand. Whilst we expect rents and house prices to rise over the next few years, an era of relatively high borrowing costs will cap growth relative to historic levels.
- During the last few years, higher interest rates on cash savings and easy access investments have become more appealing than the returns from buy-to-let. However, interest rate cuts by the Bank of England are starting to close the gap again.
Benefits of holding or purchasing a new buy-to-let
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We expect rents to continue rising faster than house prices, boosting yields further. Our research team forecast that rents will rise 17% between the end of 2024 and 2027 across Great Britain, outpacing house price growth of 12.5%. This will particularly benefit existing landlords, who will continue to see rents rise, having bought when property prices were lower.
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Projected interest rate cuts in 2025 and 2026 should reduce mortgage costs, improving profitability. As savings rates decline, property investment may become comparatively more appealing than cash deposits.
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The housing market's gradual recovery offers potential for capital appreciation. The average landlord sold their buy-to-let in 2024 for £102,800, or 53% more than they paid when they bought it ten years ago. When combined with rental income and having deducted allowances for maintenance costs, this equates to an average total return of 8.6% annually.
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Demographic trends and the higher interest rate era will likely keep more potential first-time buyers in the rental market for longer, underpinning demand for rental properties.
Buy-to-let can offer portfolio diversification for investors. Owning a physical asset provides investors with greater control and offers them the opportunity to add value over time by renovating or extending a property.
Considerations for new buy-to-let investments
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Focus on areas with strong tenant demand and cater to that specific demographic. For example, young professionals in an area often prefer two similar-sized bedrooms compared to couples or families. The trend of households renting later in life may also present new opportunities.
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Run your numbers carefully, accounting for all costs, including service charges, maintenance, and taxes. While flats and HMO properties tend to offer higher yields than family houses, the additional costs can soon eat into profits.
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Higher rates mean that buy-to-let increasingly only stacks up for investors who can put down a bigger deposit, especially in lower-yielding areas. Consider putting down a bigger deposit to meet stress tests and ensure monthly cashflow remains positive.
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Consider the potential benefits of moving an existing buy-to-let portfolio or future purchases into a limited company structure, although it may not work for everyone.
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While yield is important, historically, many investors have reaped the benefits of capital growth over the long term. Consider ways to add value to a property, perhaps by optimising the layout, extending, or improving the energy efficiency.
- Consider geographical diversification. While Northern regions tend to offer higher yields, opportunities still exist in the South. Our research team predict that property prices in the South of England will outpace those in the North over the next few years.
If you're worried about how the Renters' Rights Bill's proposed changes might impact you, contact our local lettings experts below.
