Is it worth being a landlord in 2023?

Jul 14, 2023

|Writer

Updated June 7, 2023

A combination of rising mortgage rates and a new industry reform bill is prompting some buy-to-let landlords to sell up – so is it still worth being one?

The Renters Reform Bill is set to bring in a swathe of major changes for both tenants and landlords. It was introduced to parliament last month, but is not expected to become law until 2024.

The bill has generally been praised for how it is set to protect tenants, giving them assurances that they will be able to stay in their homes beyond fixed tenancies. It will also render it more difficult for landlords to increase rents.

With mortgage rates rising and repayments becoming more expensive, this may give landlords pause to consider whether or not it is still feasible to let out properties and continue to turn a reasonable profit.

We look at what being a landlord means in 2023 and whether it's still worth it:

Read more: What's happening to UK house prices?

Mortgage rates shot up in October 2022, when the average two-year fixed-rate deal climbed as high as 6.55%. Rates fell slightly in the months thereafter, but have spiked recently due to expectations that the Bank of England will continue to raise the base interest rate. On 7 June, the average two-year fixed rate deal was 5.47%, according to Moneyfacts.

This means that in order to keep their rental incomes the same, landlords have increased rents across the board.

In October 2021, the average two-year fixed mortgage deal was 2.25%. If you own a rental property and are repaying a mortgage of £250,000 with that deal, you need to charge a monthly rent of £1,090 to cover monthly repayments entirely.

When that deal ends in October, assuming mortgage rates stay at their current level, you’d need to increase the monthly rental charge to £1,568 to continue to cover monthly repayments. That's a 44% increase, and one that may be impossible for your tenants to meet. This means you may need to cover some of the mortgage repayment from your own pocket.

This doesn't, however, mean that being a buy-to-let landlord is not financially viable in the current climate. It's a common misconception that letting out properties is only profitable when a mortgage is being repaid in its entirety.

Ultimately, your tenants are still paying you money that goes towards a property that you own, and may well one day sell or move into.

There's also no telling what will happen to interest rates in the future. Rates are high right now, but falling inflation is likely to affect the base interest rate.

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In 2016, the government implemented a 3% stamp duty surcharge on additional properties including second homes and properties purchased for buy-to-let purposes.

To give an example, a landlord purchasing a £300,000 property will pay an additional £9,000 compared to someone buying a place to live in. In Scotland, the surcharge for second homeowners and buy-to-let landlords is even higher at 4%.

Since 2017, the government has also been reducing mortgage interest relief. Previously, landlords were able to deduct the interest paid on their mortgage from their taxable income, providing a 40% tax relief for higher-rate taxpayers.

The current scheme offers landlords a flat-rate tax credit equivalent to 20% of their mortgage interest.

Additionally, landlords are now required to declare the income used to cover their mortgage payments on their tax returns. Under the previous system, they could declare rental income after deducting mortgage repayments. This change may push some landlords from the basic tax rate into the higher tax rate.

Adjustments have also been made to capital gains tax. In April, the capital gains tax-free allowance was reduced from £12,300 to £6,000. In April 2024, this will halve to £3,000. This means landlords will need to fork out more in capital gains tax when selling property.

Read more: ‘Can we avoid £22,000 in stamp duty?’

If you want to evict a tenant, it will become significantly more difficult after the Renters’ Reform Bill passes. This is because the bill bans Section 21 no-fault evictions.

However, the government has promised that there will be certain exceptions for landlords. These include wishing to sell the property, or house close family members within it.

The bill is also set to make it easier for landlords to repossess properties in instances where ‘tenants are at fault’, for example repeated missed rent payments or cases of anti-social behaviour. In these instances, the notice periods for evictions will actually be shorter than they are now.

For instance, if a tenant has allowed a property to deteriorate, they may legally be evicted with just two weeks notice. If they are in rent arrears, the notice period is four weeks.

Nonetheless, these assurances have not been enough to convince landlords that they will be able to smoothly and quickly evict bad tenants.

"Responsible landlords need to be confident that when Section 21 ends, where they have a legitimate reason, they will be able to repossess their properties as quickly as possible," said Ben Beadle, chief executive of the National Residential Landlords Association.

"Whilst we welcome the Government's pledge to ensure landlords can effectively recover properties from anti-social tenants and those failing to pay rent, more detail is needed if the Bill is going to work as intended."

Read more: ‘We can't afford our rent increase, can we appeal it?’

Under the proposed rental reforms, fixed-term tenancies will be banned and replaced by rolling tenancies. These can only be terminated if either the tenant gives the landlord two months notice or the landlord evicts the tenant via one of the new repossession grounds outlined above.

This means that buy-to-let landlords will find it more difficult to plan for the future of their rental property, as it will be much harder to know exactly when tenants will leave.

That said you will still have grounds to terminate the tenancy if, say, you want to sell up, as explained above.

Rolling contracts could also cause complications for landlords letting to students.

Students may choose to stay on longer than the length of their tenancies following graduation, which could disrupt landlords’ business models as it may prove much more difficult to find new tenants in the middle of an academic year.

However, landlord associations are challenging the government on this policy, and hope to have it modified before the bill goes before parliament to allow for student lettings.

"The Government must recognise the serious concerns of landlords letting to students about open ended tenancies," said Ben Beadle of the NRLA.

"Without the ability to plan around the academic year, students will have no certainty that properties will be available to rent when they need them."

Read more: To rent or to buy? Sorry, but there's no debate

The introduction of a new ‘Private Rented Sector Ombudsman’ intends to solve issues between landlords and tenants in a fair and impartial way.

In theory, this should make things easier for both parties. It also means that if a landlord does not adequately respond to a complaint, the tenant will be able to go straight to the ombudsman.

The ombudsman can then force the landlord to pay compensation of up to £25,000.

Landlords will have to pay to be registered – although a charge has not yet been set. Landlords who do not join could face hefty fines of up to £5,000.

Read more: Guide to property investment

As part of the Renters’ Reform Bill, landlords will soon be able to only increase rents once per year. Landlords will also need to give two months notice before any rent increases.

Tenants will also be able to appeal instances where landlords have increased rents by more than market value. An independent tribunal will make a judgement on what constitutes this.

This means that if a landlord's mortgage repayments shoot up due to rising interest rates, they may end up out of pocket until they are allowed to implement a rent increase.

Read more: ‘My service charge has gone up 10% – do I have to pay it?’

The Decent Homes Standard outlines what a landlord should provide a tenant with regards to their living conditions. It includes modernity of facilities, being in a reasonable state of repair and insulation.

Currently, these standards only apply to social housing. However, the government has said it plans to enforce the same rules for private landlords, too.

Buy-to-let landlords that provide homes that do not comply with the Decent Homes Standard will be held accountable via a new ‘property portal’. This will contain a database of landlords and their rental properties.

Prospective tenants will be able to see instances where a property has breached the Decent Homes Standard, and outstanding issues yet to be resolved.

Read more: How to avoid stamp duty

You may be wondering whether to purchase your buy-to-let through a limited company.

This can be worth considering as it can decrease your tax bill if you’re a higher rate taxpayer. The rental income requirements can be lower for limited companies applying for home loans.

However, it's worth bearing in mind that the number of buy-to-let mortgages on offer for limited companies tends to be lower than for private individuals.

Find out more about registering as a limited liability company (LLC) to buy a rental property.

In England and Wales, currently, a private rented home must have a minimum energy performance of E before being let.

However, under government proposals, all new lets from April 2028 would need to meet a minimum EPC rating of C.

These improvements could prove costly for old homes. Failing to meet the deadline could see landlords facing a fine of up to £30,000.

Read more: The pros and cons of green mortgages

Applicants’ affordability when securing buy-to-let mortgages is typically measured by the interest coverage ratio (ICR). This ratio compares the rental income to mortgage interest payments.

While the criteria may vary between lenders, a lower-rate taxpayer would typically need the rental income to exceed the mortgage payment by 125%. Meanwhile, a higher-rate taxpayer would face a more stringent requirement, usually of around 145%.

Furthermore, lenders employ stress tests to mitigate risks associated with potential interest rate increases. They’ll typically add 1% to 2% to affordability checks.

For instance, an investor with a property valued at £300,000 and an average gross yield of 6% would expect an annual rental income of approximately £18,000. Assuming a mortgage rate of 5% and a 25% deposit, the investor's annual mortgage interest payment would amount to £12,504.

To meet the interest coverage ratio test of 125%, the lender would require rental income of £15,630 per year. This figure would rise to as high as £21,885 to pass the additional 2% stress test.

An average higher-rate taxpayer aiming to generate even a small profit in the first year would need to secure a gross yield over 7%.

However, basic-rate taxpayers only need a yield above 5%, giving them more flexibility.

It's also worth looking at mortgage affordability.

You may want to take into account how house prices may evolve over time when making a buy-to-let property purchase.

If property prices fall, as they have in recent months according to some data, your capital will reduce. This means you could end up in the choppy waters of negative equity.

Read more: Everything you need to know about buy-to-let mortgages

If you’re considering becoming a buy-to-let landlord, you need to consider the following:

Read more: Tenancy rights explained

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