Have interest rates broken buy to let?

Property investors have enjoyed over a decade of ultra-cheap mortgages. Now these low fixed rate deals are ending and some landlords are feeling the squeeze. Is a big sell-off on the horizon?

Depending on whose statistics you prefer, between a third and a half of all buy to let investors have no mortgage. As rents increase, the yield on their original investment rises and they enjoy long term capital growth. They're just fine. They are sitting on a very sound investment.

Those who are mortgaged will be reaching for a calculator. They might also, perhaps, be reflecting on their original objectives and whether they can still be met.

Buy to let - a business or an investment?

During the low interest period, investors were able to take out high loan to value interest only mortgages and rent the property out, generating a surplus. Some grew their portfolios, effectively running a part time or full time business.

Those who bought relatively recently in low yield areas - mainly southern England - are the group most vulnerable to interest rates. Hamptons Research analysed data from mortgage lender Skiptons and found that these represent around 8% of landlords, collectively owning 450,000 homes. 

This group, often managing highly leveraged properties as a cash positive business, are now at risk of becoming cash negative. Many will be faced with the choice of reducing their debt or selling.If there is a sell-off, this is the segment where many are likely come from.

A further 22% are estimated to be carrying high debt, but are invested in properties generating higher yields, offering some level of protection against rising borrowing costs.

The other 70% of landlords are less heavily borrowed and consequently more shielded from rate rises. Among this group are those who regard property as a long term investment. 

Time is key to successful property investment. Once the asset has been bought, its base price is fixed. Although interest rates will fluctuate, over the long term, rising rents will make those fluctuations progressively less significant while capital growth steadily builds.

The headlines may shout "buy to let is dead", and they're right - but only for a small part of the market. Long term investors, borrowing prudently, will continue to thrive.

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