The Bank of England has now raised the base rate four times since December. With mortgage rates on the rise too – what does this mean for landlords?

Drawing on their experience across the buy-to-let, property and regional markets, the Knight Frank Finance team addresses key questions sent to us by landlords in May to offer practical advice and insight to help plan for the months ahead.

• Do you have any advice for purchasing your first buy-to-let property?

“Firstly, have a think about your investment strategy,” says Knight Frank Finance mortgage specialist, Krina Desai. “How long you intend to keep the property will be important for capital return, for example, while the area you choose may have a better yield than the appreciation forecast. The calculation for borrowing a buy-to-let property will be based on deposit and anticipated rents, so this should also be a consideration. It's also important to understand the tax implications, including whether you should purchase in your personal name or within a limited company structure.”

Huy Le, Knight Frank Finance buy-to-let specialist adds: “A limited company can have Inheritance Tax (IHT) benefits. In a limited company, for example, you can add your children as shareholders and they can pay themselves salary/dividends rather than incurring IHT on the property upon your death.”

• What’s achieving the highest investment return at the moment in the lettings market?

“House of multiple occupancy – or HMOs – generally tend to get the highest yield and when created with a limited company structure are much more tax efficient,” adds Huy. “In London, I’m seeing up to 4.5% returns. On the outskirts of London that increases to between 5-6%. In some of the cities and towns in the North they’re as high as 12%. Bolton or Bradford are two examples of this because the properties are lower value, yet the rents are still quite high.”

• What additional costs do landlords face in the future?

“Increased regulation around health and safety in terms of electrical regulations could mean further costs,” says Knight Frank Regional Partner, David Mumby. “But proposed changes to the EPC rules is getting the most headlines. Once approved by parliament, this would mean from around 2026 rental properties will have to have an energy efficiency rating of band C or above. The cost of making these improvements is increasing and includes elements such as wall insulation, improving windows, and boiler and heating system upgrades. Green mortgages can be helpful where costs total thousands of pounds, so it’s best to speak to a mortgage adviser to find out whether this could be a benefit to you.”

• Are longer term capital and rental returns in London outpacing the North or have the tables turned?

“The extraordinary rate of growth seen outside the capital is coming to an end, while London is starting to pick up,” says David. “Knight Frank Research is forecasting price growth of between 20-26% by 2026 in the capital, with areas such as Notting Hill already picking up.

“Average yields will be stronger outside the capital, with London achieving around 3.5% on average. Although rents are rising and we’re starting to see capital appreciation. With the cost of acquiring buy-to-let properties in London remaining a significant barrier, I’d say to focus outside the capital if you’re looking for higher yields. If you’re looking for significant capital appreciation look within London.”

• With a high concentration of new builds being delivered across London, what are the chances of successfully letting?

“Despite the volumes of new builds emerging, there continues to be a real under supply of housing in London, so I would put the chances of successfully letting at almost 100%,” says David. “We have an active waiting list of people wanting to sign up to new build properties, with vacancy periods and void rates at basically nil.

“New builds are also very rapidly improving the quality of the capital’s housing stock, which is giving landlords who own these types of homes a competitive advantage over traditional housing stock. Recent pricing seen in Canary Wharf was similar to prime central London – priced at £600/week for 1-bed flat and £950/week for 2-bed flat. These prices wouldn’t have existed a few years ago, but now we’re seeing whole buildings being let in a matter of weeks.”

If you are interested in exploring any of the topics mentioned and would like to discuss your options, contact one of our experts who would be happy to help. We have access to over 200 lenders, and can help find the most suitable and cost-effective mortgage for you.