A landlord who purchased a property last year with the minimum 25% deposit will likely see a profit of only £760 this year as a limited company or lower-rate taxpayer, according to the latest Hamptons buy-to-let report. 

In contrast, an average investor who obtained a 75% loan-to-value (LTV) mortgage two decades ago can expect to remortgage at a 32% LTV in 2023, generating an annual post-tax profit of £4,120.

According to the report, it’s younger investors who recently maximised their borrowing who are facing higher risks of incurring losses due to rising mortgage rates. Meanwhile, older landlords, especially those who have not released equity, are expected to be less affected by the changing conditions.

According to the report’s example, a landlord with a 75% LTV and paying basic-rate tax would only be able to tolerate mortgage rates of up to 5%. However, an average landlord with a 60% LTV could still turn a profit with a mortgage rate of up to 7%.

While rising mortgage costs pose challenges, most existing investors have seen their yields increase over time due to rising rents, providing some cushion against higher expenses. However, for rents to compensate for the increase in mortgage rates to 5% over the past year, they would need to rise by 28% across England and Wales, the study found.

Investors who purchased properties in 2015 experienced an initial average gross yield of 6.1%. Thanks to rental growth, those same properties now achieve an average yield of 7.3% relative to the original purchase price. Even landlords who entered the market in 2021 have already witnessed a 0.6% increase in their yield, partially insulating them from the impact of rising interest rates.

On paper, the average landlord now needs to be earning a gross yield in excess of 4% to turn a profit, according to the report. This is based on a lower-rate taxpayer or limited company landlord who owns a £200k buy-to-let with a 60% LTV mortgage. 

By contrast, in 2020, when rates were lower, investors could still make money with yields of 2%, the analysis found. Higher-rate taxpayers now need a yield of at least 5% to stay out of the red once mortgage payments, maintenance costs and tax have been accounted for.

Generally, the longer an investor has owned a buy-to-let property, the more they have gained from appreciation. Assuming no equity withdrawals, their LTV ratio will be lower compared to the property’s current value, meaning they will be less affected, said the report. According to Hamptons’ example, an average lower-rate taxpayer landlord who purchased a property five years ago for around £155,000, now worth £200,000, is likely to turn a profit of £2,070 when remortgaging at the February 2023 average rate of 4.84%.