Against a backdrop of higher mortgage rates, investors are adapting. So far this year, 12.1% of homes sold in Great Britain were purchased by a buy-to-let landlord, the same level as in 2022. While existing investors are paying down debt, new investors, particularly those wanting to buy in the lowest yielding parts of the country, are choosing cash to ensure the sums stack up. Overall, this is set to shrink the total mortgage bill for buy-to-let in 2023.
High mortgage rates have meant that new buy-to-let purchases are increasingly being funded by cash rather than a mortgage. So far this year, 59% of buy-to-let purchases in Great Britain were mortgage free, the highest share in six years and up from 53% in 2022.
The recent rise in cash purchases brings a close to landlords’ ability to access competitive mortgage deals. Sub 2% mortgage rates – available over the last few years – meant landlords who were able to buy homes outright chose instead to make the most of record low rates. Many investors spread their cash as far as it could go by topping it up with low borrowing costs to maximise their returns. However, today, investors are having to dig deeper into their savings to ensure the sums stack up on any new buy-to-lets.
The biggest shift has come in Southern areas of the country, where yields tend to be lower. A record 71% of buy-to-let purchases in areas where the average gross yield is less than 5% were mortgage free so far this year, up from 50% in 2022. This lead to 61% of investor purchases in the four Southern regions (London, South East, South West and East of England) being made in cash, up from a low of 47% in 2022. In contrast, in the North of England, cash purchases have fallen year-on-year, from 62% in 2022 to 60% in 2023. This means that for the first time since our records began, a landlord buying in the South of England is more likely to be a cash buyer than an investor buying in the North where prices are lower.
To avoid failing lender’s stress tests and to maintain landlord’s margins, a change in strategy was required. Creating a regional divide, London (the lowest yielding region in the country at 5.4%) saw the biggest jump in cash investors. Here, the share of buy-to-lets bought with cash has risen to a record 67% so far this year, up from 43% in 2022. However, average budgets have shrunk, with the average investor spending £341k on their new buy-to-let in the capital this year, down from £450k in 2022. Meanwhile, cash purchases in the North East, (the highest yielding region in the country at 8.6%) where it’s easiest to still make money with a large mortgage, fell 3% year-on-year.
Overall, we estimate that this shift towards cash ownership will save new landlords across Great Britain around £61.9m in mortgage interest payments this year. This is based on the average mortgaged investor paying £187,110 for their buy-to-let and putting down a 25% deposit.
On the flip side, it’s likely that new investors using a mortgage will pay around £405m in mortgage interest payments in 2023 if they were to buy using a 75% loan-to-value mortgage at an average rate of 5.27%. This is up from £347m in 2022 when mortgage rates were lower and there were more new buy-to-let purchases.
RENTAL GROWTH
Rental growth accelerated last month, marking the second strongest rate of growth recorded since our lettings index began. The annual increase will cost the average tenant who moves into a new home in Great Britain an additional £1,344 each year. While the number of rental homes coming onto the market rose for the fifth consecutive month, unlike in the sales market, demand from new renters remains up year-on-year too.
Rents across Great Britain hit another record high in February, averaging £1,230 pcm for a newly let home. This is up 10.0% year-on-year, marking the second strongest annual increase since our records began, sitting behind 11.5% growth recorded in May 2022.
London regained its place at the top of the rental growth charts. Here, the average rent rose to £2,161 pcm in February, 13.8% higher than the same month last year. Growth was evenly matched across both Inner and Outer London, a reversal of last year when Inner London rents were recovering from their post-Covid lows.
Rental growth in the Midlands and North isn’t too far behind however, with annual growth of 10.7% and 9.3% respectively. The Southern regions, however, where affordability is most stretched, are lagging.
In a reversal of last year, smaller homes are seeing the strongest rent rises. The average one-bed rent increased 13.0% year-on-year in February, nearly triple the 4.5% rate recorded in February 2022. Meanwhile rental growth for a three-bed home has decelerated from 10.6% in February 2022 to 8.7% in February 2023.
