Buy-to-let has long been a popular route to wealth creation. But in recent years, regulatory and other reforms have sparked debate over its viability.
The challenges to new and existing investors have mounted, although the sector remains key to the provision of housing in Britain, providing homes for millions of renters. This heightens the focus on the steps that buy-to-let landlords are taking to stay in the business and achieve long-term growth.
THE CURRENT STATE OF BUY-TO-LET
A mix of tax and legislative changes, combined with higher costs, have dented the profitability of buy-to-let.
But there has not been a mass sell-off of buy-to-let stock. Instead, landlords have adapted. They have set up limited companies and committed more cash to their portfolios. Our research shows that a record 61,517 landlords created limited companies in 2024, 23% more than in 2023.
However, far fewer new investors are entering the sector, deterred by the changes that have made buy-to-let more complex and which have added to the cost of entry. These include increases in interest rates, the raising of the stamp duty surcharge on second homes from 3% to 5% - more stringent energy efficiency requirements and the Renters’ Rights Bill. This legislation will introduce stricter curbs on rent increases alongside broader reform.
Record rent rises in 2022 and 2023 offset some of the impact of higher costs faced by buy-to-let investors. But the pace is slackening, as our monthly lettings index shows. The average monthly rent on a newly-let home in Great Britain rose to £1,372 in January. This was an annual rise of just 1.8%, the slowest rate of growth since October 2020.
Nevertheless, the average rent has soared by 34% (£348 a month) since 2020 , outpacing inflation and house prices. This growth has boosted rental yields. In 2024, the average gross yield on a newly acquired buy-to-let in England and Wales hit a record high of 7.1%, up from 6.1% in 2019.
In 2024, the North East offered a yield of 9.7%, the largest in England and Wales. In London, the return was a more modest 5.7%. However, over the past 20 years, homes in the South of England have, in the main, provided stronger capital growth.
THE CHALLENGES NOW - AND IN THE FUTURE
Tax rises are among the challenges confronting buy-to-let investors. Stamp duty has been raised and mortgage interest relief reduced, adding to entry costs and squeezing profit margins.
Higher mortgage rates have also dented profitability, but buy-to-let loan deals are becoming cheaper. The average rate on a 75% loan-to-value mortgage fixed for two years fell to 4.30% in February. In July 2023, the typical rate was 6.22%.
"We expect rents to continue rising faster than house prices, providing a further boost to yields."
This returns the cost of borrowing to its 2013 level, although the average loan size is now much greater. Some investors have set up limited companies to hold their buy-to-let portfolios, enabling them to offset costs and potentially lower their tax bills.
Tougher regulation in the shape of the Renters' Rights Bill is another issue. Energy Performance Certificate (EPC) standards have also been tightened, with further changes potentially on the horizon.
Furthermore, economic uncertainty is affecting the property market more generally, dampening house prices. Meanwhile, bank and building society deposits and other investments have been a source of decent returns in recent years. Although, the Bank of England base rate cuts have begun to make these payouts less generous.
We anticipate that house prices and rents will increase over the next few years. But steeper borrowing costs will limit future appreciation relative to past gains.
THE BENEFITS OF STAYING IN BUY-TO-LET - AND JOINING THE BUSINESS
We expect rents to continue rising faster than house prices, providing a further boost to yields. As our forecasts set out, rents are expected to be 17% higher by 2027 than at the end of 2024. Over the same period, house prices will grow by 12.5%, providing some capital growth. This will particularly benefit existing landlords who invested when property values were lower. They should also benefit from higher rents.
Over the past 10 years of ownership, the typical landlord who sold a rental home in 2024 saw the value rise by an average of £102,800, or 53% more than the price they originally paid. This means that they enjoyed an average annual total return of 8.6%, taking into account rental income and capital growth, whilst deducting allowances for maintenance expenses.
Another boost to profitability will come from the projected interest rate cuts in 2025 and 2026. Some investors who took out two-year fixed-rate mortgages when interest rates spiked may see their costs fall when they refinance. The ability to use leverage to amplify returns remains one of the key benefits of buy-to-let.
The downward direction of rates should also make buy-to-let more appealing than cash deposits.
Demographic shifts will support the need for rental properties, with many would-be homeowners already renting later in life. The decline in interest rates will not be sufficient to enable all aspiring first-time buyers to climb onto the ladder.
This will support the need for rental properties, against the background of a reassessment of the advantages of buy-to-let as a long-term investment. Owning a physical asset can give you greater control, and the opportunity to add value by renovating or extending the home.
