Why now may be the right time to invest in buy to let

While we are now into a new year, there’s no question that the mortgage market is continuing to feel the effects of 2022, and very specifically the final quarter.

The market underwent a major shock following the mini-Budget from the then-Chancellor Kwasi Kwarteng. While there were a host of likely challenges on the horizon at that point – high inflation, rising interest rates, the potential for job losses – the mini-Budget only succeeded in pouring fuel on to the fire.

The result was that lenders dramatically hiked their rates, which has caused many of those who were in the process of purchasing – whether as an owner occupier or investor – to hit the pause button.

While this is understandable, I would suggest that rather than stepping away from investing in property, now actually represents a terrific opportunity for landlords to add to their portfolios and benefit over the long term.

House price drops help

The market upheaval following the mini-Budget is already feeding into house prices. With so many would-be buyers putting off their purchases, we have seen house prices drop for four consecutive months according to the house price indices from both Halifax and Nationwide.

What’s more, the consensus among the property industry appears to be that there will be further falls to come this year.  However, this is unlikely to be a long term trend. With London for example, Savills has suggested that while prices will drop by 2% this year, they will then go up for by 2% in 2024, 5% in 2025, 4% in 2026 and 4% in 2027. Sure, there’s some short term pain, but that very quickly turns into a compound gain of 13.5%.

Now, I’m not saying that this is exactly what will happen, nor that what we see in London and the South East will be replicated elsewhere. But what is true is that the factors which have driven the incredible house price growth seen over the last decade or more – namely the underlying shortage of property – is not likely to be addressed in a material way any time soon.

That presents investors with a real opportunity, the chance to take advantage of a lower purchase price and then enjoy greater capital growth in the years ahead.

Rising rents

The shortage of property extends to the rental market too. As some landlords have exited the market, it has meant that even those renting their homes face a slimmer range of options, with the inevitable result rents being driven up.

New figures from Hamptons show that the average rent on a newly let home in December was £1,216 per calendar month (pcm), up 7.7% from the year prior. That’s the strongest annual growth recorded by Hamptons for a December since it started tracking the data in 2013, and represents a growth of more than £1,000 a year for the typical tenant.

But while demand has grown, data from Rightmove shows that supply is lagging behind – between Q3 of 2021 and 2022, rental supply dropped by 5% across Great Britain.

This imbalance is only likely to push rents higher, meaning that brave investors can not only take advantage of capital growth but an enviable rental income to boot.

Mortgage lenders are keen

It’s worth reflecting on what’s happening in the mortgage market at the moment, and why that should provide ambitious investors with hope.

The mini-Budget upheaval saw big reprices from mortgage lenders, taking some fixed rates to 6-7% – the sort of rate that’s unthinkable for many borrowers. Yet we are now seeing fixed rates come down significantly, to the point that you can now get a five-year fixed rate at much more attractive levels.

Variable mortgages continue to represent arguably even better value. They are often around 1% cheaper than their fixed counterparts, and with little expectation that the base rate will increase by that level this year, they could offer a smart way to keep your buy-to-let costs even lower. We have recommended variable mortgages to our clients more over the last few months than at any point in the last 10 years, precisely because of that value they offer should base rate move in line with expectations.

Ultimately it will come down to the individual borrower and their attitude to risk, but the reality is that should you invest in the right buy-to-let property, profits can be made with either a fixed or variable rate deal. Mortgage lenders are keen to attract business, which is making them price deals ever more competitively.

The importance of advice

While our specific recommendations may have shifted in recent months, what hasn’t changed is the importance of getting independent advice from a mortgage broker. Brokers play a crucial role for mortgage borrowers of all kinds, but this is only amplified with buy to let, since the decision over a mortgage will have a big bearing over the success of the investment.

It’s not just our expertise and insight that borrowers value so highly – using a broker like Rose Capital opens up products and lenders that investors could not access if borrowing directly. What’s more, these lenders are often specialists, meaning their products are designed precisely to suit the more professional investor.

As a result, going through a broker not only means benefiting from our market insight, but also a wider level of product choice, which will help put your property portfolio on the best possible footing.