Segmenting the sector

The latest government survey of landlords puts the age of the average buy-to-let investor at 59, with just 15% under the age of 45. This means most have been in the business for quite a while and have seen their fair share of house price and rental growth. Using Skipton Building Society data, we know that the average existing landlord who re-mortgaged in 2022 had an LTV of 55%, and as a result, the average existing landlord should be relatively shielded from the impact of higher mortgage rates, certainly more so than those who bought more recently.

The bulk of the sector – around 45% of rented homes – is low yield but low loan-to-value (LTV). This includes any property with a gross yield of 5% and below and either no mortgage debt (around 40% of this group), or an LTV below 60%. These are likely to be accidental landlords and/or those who bought at least five years ago. While those with a mortgage may see lower returns at higher interest rates, almost universally they have not borrowed enough for higher rates to tip them towards the red.

The next largest group, accounting for 25% of rented homes, are those achieving high yields (above 5%), but with limited or no mortgage debt. They are disproportionately landlords with properties in the Midlands and North who have benefitted from significant house price growth but haven’t extracted their equity. This is the group most resilient to higher interest rates.

Next up are landlords who have been achieving higher yields but have also been extracting as much equity as possible to fund future portfolio growth. This cohort accounts for around 22% of rented homes. While higher interest rates won’t stop this group from turning a solid profit, they are likely to curtail their expansion plans at least partially. And, while some of these landlords might sell one or two properties in order to reduce debt on their remaining portfolio, generally their higher yielding homes will enable their portfolio to continue growing.

And, finally, there are the landlords most at risk due to higher interest rates – around 8% of the market, making up 450,000 rented homes. These tend to be those who bought relatively recently (predominantly within the last five years) and are disproportionately based in the south of the country where yields are lower. As their larger mortgages reach the end of their fixed-term, landlords will face paying down some debt and hiking rents as far as they can or, ultimately, selling.